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Annuities—a type of insurance product— can be an effective investment vehicle, especially in providing for your retirement. This Financial Guide will help you decide whether annuity investments are right for you and how to use them in retirement planning. It also discusses the tax treatment of annuities.


How Annuities Work

Annuities may help you meet some of your mid- and long-range goals, such as planning for your retirement and for a child's college education. This Financial Guide tells you how annuities work, discusses the various types of annuities, and helps you determine which annuity product (if any) suits your situation. It also discusses the tax aspects of annuities and explains how to shop for both an insurance company and an annuity, once you know which type you'll need.

While traditional life insurance guards against "dying too soon," an annuity, in essence, can be used as insurance against "living too long." In brief, if you buy an annuity (generally from an insurance company, which invests your funds), you will receive in return a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income" until your death. If you "die too soon" (that is, you don't outlive your life expectancy), you will get back from the insurer far less than you paid in. On the other hand, if you "live too long" (and do outlive your life expectancy), you may get back far more than the cost of your annuity (and the resultant earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.

The earnings that occur during the term of the annuity are tax-deferred. You are not taxed on them until they are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.

How Annuities Best Serve Investors

Tip: Assess the costs of an annuity relative to the alternatives. Separate purchase of life insurance and tax-deferred investments may be more cost effective.

The two primary reasons to use an annuity as an investment vehicle are:

  1. You want to save money for a long-range goal, and/or
  2. You want a guaranteed stream of income for a certain period of time.

Annuities lend themselves particularly well to funding retirement and, in certain cases, education costs.

One negative aspect of an annuity is that you cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10% premature-withdrawal penalty on money taken out of a tax-deferred annuity before age 59-1/2 and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers’ penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.

These penalties lead to a de facto restriction on the use of annuities primarily as an investment. It only makes sense to put your money into an annuity if you can leave it there for at least ten years and the withdrawals are scheduled to occur after age 59-1/2. These restrictions explain why annuities work well for either retirement needs or for cases of education funding where the depositor will be at least 59-1/2 when withdrawals begin.

Tip: The greater the investment return, the less punishing the 10% penalty on withdrawal under age 59-1/2 will appear. If your variable annuity investments have grown substantially, you may want to consider taking some of those profits (despite the penalty, which applies only to the taxable portion of the amount withdrawn).

Annuities can also be effective in funding education costs where the annuity is held in the child’s name under the provisions of the Uniform Gifts to Minors Act. The child would then pay tax (and 10% penalty) on the earnings when the time came for withdrawals.

Caution: A major drawback is that the child is free to use the money for any purpose, not just education costs.

The Various Types Of Annuities

The available annuity products vary in terms of (1) how money is paid into the annuity contract, (2) how money is withdrawn, and (3) how the funds are invested. Here is a rundown on some of the annuity products you can buy:

  • Single-Premium Annuities: You can purchase a single-premium annuity, in which the investment is made all at once (perhaps using a lump sum from a retirement plan payout). The minimum investment is usually $5,000 or $10,000.
  • Flexible-Premium Annuities: With the flexible-premium annuity, the annuity is funded with a series of payments. The first payment can be quite small.
  • Immediate Annuities: The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.
  • Deferred Annuities: With a deferred annuity, payouts begin many years after the annuity contract is issued. You can choose to take the scheduled payments either in a lump sum or as an annuity—i.e., as regular annuity payments over some guaranteed period. Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used to fund tax-deferred retirement plans and tax-sheltered annuities. They may be funded with a single or flexible premium.
  • Fixed Annuities: With a fixed annuity contract, the insurance company puts your funds into conservative fixed income investments such as bonds. Your principal is guaranteed and the insurance company gives you an interest rate that is guaranteed for a certain minimum period—from a month to several years. This guaranteed interest rate is adjusted upwards or downwards at the end of the guarantee period. Thus, the fixed annuity contract is similar to a CD or a money market fund, depending on the length of the period during which interest is guaranteed. The fixed annuity is considered a low-risk investment vehicle. All fixed annuities also guarantee you a certain minimum rate of interest of 3 to 5% for the entirety of the contract. The fixed annuity is a good choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low. Fixed annuity investors benefit if interest rates fall, but not if they rise.
  • Variable Annuities: The variable annuity, which is considered to carry with it higher risks than the fixed annuity—about the same risk level as a mutual fund investment— gives you the ability to choose how to allocate your money among several different managed funds. There are usually three types of funds: stocks, bonds, and cash-equivalents. Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings.

     

Tip: You can switch your allocations from time to time for a small fee or sometimes for free.

The variable annuity is a good annuity choice for investors with a moderate to high risk tolerance and a long-term investing time horizon.

Caution: Variable annuities have higher costs than similar investments that are not issued by an insurance company.

Caution: The taxable portion of variable annuity distributions is taxable at full ordinary rates, even if they are based on stock investments. They do not enjoy capital gains relief or the reduced taxation available after 2002 and before 2009 for dividends from stock investments (including mutual funds).

Tip: Today, insurers make available annuities that combine both fixed and variable features.

Tip: Before buying an annuity, contribute as much as possible to other tax-deferred options such as IRA’s and 401 (k) plans. The reason is that the fees for these plans is likely to be lower than those of an annuity and early-withdrawal fees on annuities tend to be steep.

Tip:IRA contributions are sometimes invested in flexible premium annuities—with IRA deduction, if otherwise available. You may prefer to use IRAs for non-annuity assets. Non-annuity assets gain the ability to grow tax-free when held in an IRA. The IRA regime adds no such benefit to annuity assets which grow tax-free in or outside IRAs.

Choosing A Payout Option

When it’s time to begin taking withdrawals from your deferred annuity, you have various choices. Most people choose a monthly annuity-type payment, although a lump sum withdrawal is possible.

Caution: Once you have chosen a payment option, you cannot change your mind.

The size of your payout (settlement option) depends on:

  1. The size of the amount in your annuity contract
  2. Whether there are minimum required payments
  3. Your life expectancy (or other payout period)
  4. Whether payments continue after your death

Here are summaries of the most common forms of payout:

Fixed Amount

This type gives you a fixed monthly amount—chosen by you—-that continues until your annuity is used up. The risk of using this option is that you may live longer than your money lasts. Thus, if the annuity is your only source of income, the fixed amount is not a good choice. If you die before your annuity is exhausted, your beneficiary gets the rest.

Fixed Period

This option pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you are seeking retirement income before some other benefits start, this may be a good option. If you die before the period is up, your beneficiary gets the remaining amount.

Lifetime or Straight Life

This form of payments continues until you die. There are no payments to survivors. The life annuity gives you the highest monthly benefit of the options listed here. The risk is that you will die early, thus leaving the insurance company with some of your funds. The life annuity is a good choice if (1) you do not need the annuity funds to provide for the needs of a beneficiary and (2) you want to maximize your monthly income.

Life With Period Certain

This form of payment gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period, the lower the monthly benefit.

Installment-Refund

This option pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary. Monthly payments are less than with a straight life annuity.

Joint And Survivor

In one joint and survivor option, monthly payments are made during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor. In the option typically used for retired employees (employment model), monthly payments are made to the retired employee, with the same or a lesser amount to the employee's surviving spouse or other beneficiary. The difference is that with the employment model , the spouse's (or other co-annuitant's) death before the employee won't affect what the survivor employee collects. The amount of the monthly payments depends on the annuitants' ages, and whether the survivor's payment is to be 100% of the joint amount or some lesser percentage.

How Payouts Are Taxed

The way your payouts are taxed differs for qualified and non-qualified annuities.

Qualified Annuity

A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (simplified employee pension), or some other retirement plan. The tax-qualified annuity, when used as a retirement savings vehicle, is entitled to all of the tax benefits—and penalties—that Congress saw fit to attach to such qualified plans.

The tax benefits are:

  1. Any nondeductible or after-tax amount you put into the plan is not subject to income tax when withdrawn
  2. The earnings on your investment are not taxed until withdrawal

If you withdraw money from a qualified plan annuity before the age of 59-1/2, you will have to pay a 10% penalty on the amount withdrawn in addition to paying the regular income tax. There are exceptions to the 10% penalty, including an exception for taking the annuity out in a series of equal periodic payments over the rest of your life.

Once you reach age 70-1/2, you will have to start taking withdrawals in certain minimum amounts specified by the tax law (with exceptions for Roth IRAs and for employees still working after age 70-1/2).

Non-Qualified Annuity

A non-qualified annuity is purchased with after-tax dollars. You still get the benefit of tax deferral on the earnings. However, you pay tax on the part of the withdrawals that represent earnings on your original investment.

If you make a withdrawal before the age of 59-1/2, you will pay the 10% penalty only on the portion of the withdrawal that represents earnings.

With a non-qualified annuity, you are not subject to the minimum distribution rules that apply to qualified plans after you reach age 70-1/2.

Tax on Your Beneficiaries or Heirs

If your annuity is to continue after your death, other taxes may apply to your beneficiary (the person you designate to take further payments) or your heirs (your estate or those who take through the estate if you didn't designate a beneficiary).

Income tax: Annuity payments collected by your beneficiaries or heirs are subject to tax on the same principles that would apply to payments collected by you.

Exception: There's no 10% penalty on withdrawal under age 59-1/2 regardless of the recipient's age, or your age at death.

Estate tax: The present value at your death of the remaining annuity payments is an asset of your estate, and subject to estate tax with other estate assets. Annuities passing to your surviving spouse or to charity would escape this tax.

Tip: Ask your sales representative for a recent survey by Variable Annuity Research & Data Service. Many annuity portfolios are tracked by this service.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

How To Shop For An Annuity

Although annuities are issued by insurance companies, they may be purchased through banks, insurance agents, or stockbrokers.

There is considerable variation in the amount of fees that you will pay for a given annuity as well in the quality of the product. Thus, it is important to compare costs and quality before buying an annuity.

First, Check Out The Insurer

Before checking out the product itself, it is important to make sure that the insurance company offering it is financially sound. Because annuity investments are not federally guaranteed, the soundness of the insurance company is the only assurance you can rely on. Consult services such as A.M. Best Company, Moody’s Investor Service, Standard & Poor’s Ratings, Duff & Phelps Credit Rating Company, and Fitch IBCA, The International Rating Agency to find out how the insurer is rated.

Next, Compare Contracts

The way you should go about comparing annuity contracts varies with the type of annuity.

  • Immediate annuities: Compare the settlement options. For each $1,000 invested, how much of a monthly payout will you get? Be sure to consider the interest rate and any penalties and charges.
  • Deferred annuities: Compare the rate, the length of guarantee period, and a five-year history of rates paid on the contract. It is important to consider all three of these factors and not to be swayed by high interest rates alone.
  • Variable annuities: Check out the past performance of the funds involved.

Tip: Ask your sales representative for a recent survey by Variable Annuity Research & Data Service. Many annuity portfolios are tracked by this service.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

Costs, Penalties, And Extras

Be sure to compare the following points when considering an annuity contract:

Surrender Penalties

Find out the surrender charges (that is, the amounts charged for early withdrawals). The typical charge is 7% for first-year withdrawals, 6% for the second year, and so on, with no charges after the seventh year. Charges that go beyond seven years, or that exceed the above amounts, should not be acceptable.

Tip: Be sure the surrender charge "clock" starts running with the date your contract begins, not with each new investment.

Fees And Costs

Be sure to ask about all other fees. With variable annuities, the fees must be disclosed in the prospectus. Fees lower your return, so it is important to know about them. Fees might include:

  • Mortality fees of 1 to 1.35% of your account (protection for the insurer in case you live a long time)
  • Maintenance fees of $20 to $30 per year
  • Investment advisory fees of 0.3% to 1% of the assets in the annuity’s portfolios.

Extras

These provisions are not costs, but should be asked about before you invest in the contract.

Some annuity contracts offer "bail-out" provisions that allow you to cash in the annuity if interest rates fall below a stated amount without paying surrender charges.

There may also be a "persistency" bonus which rewards annuitants who keep their annuities for a certain minimum length of time.

In deciding whether to use annuities in your retirement planning (or for any other reason) and which types of annuities to use, professional guidance is advisable.

Risk To Retirees of Using An Immediate Annuity

At first glance, the immediate annuity would seem to make sense for retirees with lump-sum distributions from retirement plans. After all, an initial lump-sum premium can be converted into a series of monthly, quarterly, or yearly payments that represent a portion of principal plus interest and is guaranteed to last for life. The portion of the periodic payout that constitutes a return of principal is excluded from taxable income.

However, this strategy contains risks. For one thing, when you lock yourself into a lifetime of level payments, you fail to guard against inflation. Furthermore, you are gambling that you will live long enough to get your money back. Thus, if you buy a $150,000 annuity and die after collecting only $60,000, the insurer often gets to keep the rest. Unlike other investments, the balance doesn't go to your heirs. Finally, since the interest rate is fixed by the insurer when you buy it, you may be locking yourself into low rates.

You can hedge your bets by opting for a "period certain", or "term certain" which, in the event of your death, guarantees payment for some years to your beneficiaries. There are also "joint-and-survivor" options (which pay your spouse for the remainder of his or her life after you die) or a "refund" feature (in which some or all of the remaining principal is resumed to your beneficiaries).

Some plans offer quasi-inflation adjusted payments. One company offers a guaranteed increase in payments of $10 at three-year intervals for the first 15 years. Payments then get an annual cost-of-living adjustment with a 3% maximum. However, for these enhancements to apply, you will have to settle for much lower monthly payments than the simple version.

Recently, a few companies have introduced immediate annuities that offer potentially higher returns in return for some market risk. These "variable immediate annuities" convert an initial premium into a lifetime income; however, they tie the monthly payments to the returns on a basket of mutual funds.

Older seniors—75 years of age and up— may have fewer worries about inflation or liquidity. Nevertheless, they should question whether they really need such annuities at all.

If you want a comfortable retirement income, consider a balanced portfolio of mutual funds. If you want to guarantee that you will not outlive your money, you can plan your withdrawals over a longer time horizon.

Source: CPA Site Solutions

Debt should be incurred with caution. Yet there are ways to take advantage of your available credit to enjoy a purchase, make an investment, or take care of an emergency. Here is a guide to finding out which form of borrowing will best suit your needs and some pointers on finding the lowest-cost loan available.


Types Of Loans

Let’s take a look at the various ways you can borrow money—and the negative and positive aspects of each.

Home Equity Loans

By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please at an interest rate that is relatively low. Furthermore, under the tax law—depending on your specific situation—you may be allowed to deduct the interest because the debt is secured by your home.

Home Equity Lines Of Credit

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills—not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit— your credit limit—that is the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the appraised value of the home and subtracting the balance owed on the existing mortgage.

Example: A home with a $60,000 mortgage debt is appraised at $200,000. The bank sets a 75% credit limit. Thus, the potential credit line is $90,000 (75% of $200,000 = $150,000 - $60,000).

In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, other financial obligations, and your credit history.

Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the loan may allow you to renew the credit line. But, in a loan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance, while others may permit you to repay over a fixed time.

Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line—for example, $300—and to keep a minimum amount outstanding.

Some lenders also may require that you take an initial advance when you first set up the line.

Traditional Second Mortgage Loans

If you are thinking about a home equity line of credit you might also want to consider a more traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

Tip: Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

Caution: Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line—the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

Automobile Loans

Automobile loans are among the most common types of loans today. Your automobile serves as the security for the loan. These loans are available not only through banks but also through automobile dealers. However, the dealer itself does not provide the financing; it simply routes the loan to an affiliated finance company, such as the General Motors Acceptance Corporation (GMAC).

Investment Loans

Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

Caution: If your margin debt exceeds 50% of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against use of margin debt, unless the amount is kept way below 50%. We think 25% is a safe percentage.

CD And Passbook Loans

Because the rate of interest you are earning on the CD or savings account is probably less than the interest that would be charged on the loan, it is usually a better idea to withdraw the money in the account (waiting until the term of the CD is up, to avoid penalties), than to borrow against it.

Loans Against 401(K) Plans And Life Insurance

One advantage of borrowing from a 401(k) plan or profit-sharing plan, assuming loans are permitted, is that the interest you pay goes back into your own pocket—right into your 401(k) or profit-sharing account. The amount of the loan is limited.

Loans against life insurance policies used to be available at fairly low rates. If you can get a rate of 5 or 6% on a loan against the cash value of your life insurance policy, it is generally a good deal. If the rate is any higher than this, such a loan is generally not a good idea.

Credit Union Loans

Credit union loans may be available at lower rates than those of banks.

Banks And Savings And Loans

If you obtain an unsecured loan at a bank, the rate will be higher because there is no collateral. For this reason, unsecured bank loans are generally not attractive.

Credit Card Advances

These are almost always a bad idea, despite their convenience, because of the high rate you will pay.

How To Shop For A Loan

If you are thinking of borrowing, your first step is to figure out how much it will cost you and whether you can afford it. Then shop for the credit terms that best meet your borrowing needs without posing undue financial risk. Look carefully at the credit agreement and examine the terms and conditions of the various possibilities, including the annual percentage rate (APR) and the costs you will pay to establish the plan.

The Truth in Lending Act requires lenders to disclose the important terms and costs of credit, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have received this information. Use these disclosures to compare the costs of loans. You usually get these disclosures when you receive an application form and you will get additional disclosures before the loan is made. If any term has changed before the loan is made (other than a variable-rate feature), the lender must usually return all fees if you decide not enter into the loan because of the changed term.

Interest Rate Charges And Loan Features

Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you, in writing and before you sign any agreement, the finance charge and the annual percentage rate.

  • The finance charge is the total dollar amount you pay to use credit. It includes interest costs, service charges and some credit-related insurance premiums. For example, a $10,000 loan may have a 10% interest rate and a service charge of $100; thus, the finance charge would total $1,100.
  • The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

Example: You borrow $10,000 for one year at 10%. If you can keep the entire $10,000 for the whole year, and then pay back 11,000 at the end of the year, the APR is 10%. On the other hand, if you repay the $10,000, and the interest (a total of $11,000) in 12 equal monthly installments, you don't really get to use $10,000 for the whole year. In fact, you get to use less and less of that $10,000 each month. In this case, the $1,000 charge for credit amounts to an APR of 18%.

All creditors—banks, stores, car dealers, credit card companies, finance companies—must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says these two pieces of information must be shown to you before you sign a credit contract or use a credit card.

Interest rates may be either fixed or variable. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). Lenders then add a margin, i.e., a number of percentage points, to the index value to arrive at the interest rate you will pay. This interest rate will change, mirroring fluctuations in the index.

Tip: Because the cost of borrowing is tied directly to the index rate, ask what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate — a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans may have a ceiling (or cap) on how high your interest rate can climb over the life of the loan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop. Some lenders may permit you to convert a variable rate to a fixed interest rate during the life of the plan or to convert all or a portion of your line to a fixed-term installment loan.

With a variable rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a loan that calls for interest-only payments. At a 10% interest rate, your initial payments would be $83 monthly. If the rate should rise over time to 15%, your payments will increase to $125 per month. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement calls for keeping payments level throughout the plan.

Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to get additional funds during any period the interest rate reaches the cap.

Repaying The Loan

Consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal of the amount you borrow plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest alone during the life of the plan, which means that you pay nothing toward the principal. Thus, if you borrow $10,000, you will owe that entire sum when the loan ends.

Regardless of the minimum payment required, you can usually pay more than the minimum. Many lenders may give you a choice of payment options.

Whatever your payment arrangements during the life of the loan—whether you pay some, a little, or none of the principal amount of the loan—you may have to pay the entire balance owed when the loan ends, all at once. You must be prepared to make this "balloon" payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose any security given for the loan (e.g., your home or car).

Comparing Loans

Even when you understand the terms a creditor is offering, it is easy to underestimate the difference in dollars that different terms can make. Suppose you are going to borrow $6,000. Compare the three credit arrangements below:

Creditor

 

APR

Length of Loan

Monthly Payment

Total Finance Charges

Total of Payments

Creditor A 14% 3 years $205.07 $1,382.52 $7,382.52
Creditor B 14% 4 years $163.96 $1,870.08 $7,870.08
Creditor C 15% 4 years $166.98 $2,015 $8,015.04

How do these choices stack up? The answer depends partly on what you need.

  • The lowest cost loan (total payments) is available from Lender A.
  • If you were looking for the lowest monthly payments, that would be available from Lender B. This is because you are paying the loan off over a longer period of time. However, you would have to pay more in total costs. The loan from Lender B—also at a 14% APR but for four years—will add about $488 to your finance charge.
  • If that four-year loan were available only from Lender C, the APR of 15% would add another $145 or so to your finance charges as compared with Lender B.

Other terms, such as the size of the down payment, will also make a difference. Be sure to look at all the terms before you make your choice.

Home Equity Loans

Before signing for a home equity line of credit or other type of home equity loan, weigh carefully the costs of a home equity debt against the benefits. Remember, failure to repay the line could mean the loss of your home.

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home, such as:

  • A fee for a property appraisal, which estimates the value of your home;
  • An application fee, which may not be refundable if you are turned down for credit;
  • Up-front charges, such as one or more points (one point equals one percent of the credit limit);
  • Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes; and
  • Yearly membership or maintenance fees.

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed. On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

Source: CPA Site Solutions

Don’t Just Look At Numbers; What’s Your Gut Telling You?

It’s not hard to find advice on how to manage your money these days. You can find plenty of it on the Internet, in books, magazines and newspapers, from well-meaning friends and relatives, and of course, from professional advisors.

But while finding financial guidance is easy, judging the worth of it can be a much tougher task. Even hiring a professional adviser is no guarantee you’ll get great advice. If you’re paying someone for a personalized plan, though, you especially want to make sure you’re getting your money’s worth.

The true test is whether you reach your goals. But if your goal is decades away – retirement, for example – you don’t want to wait until age 65 to see if you made the right moves.

I would encourage people to look at their overall situation no less than annually and assess the quality of the service they’re getting.

So what things should you look at? Ask yourself these questions when gauging money advice:

What are the numbers? The most obvious way to judge investment advice is by performance. But make sure your expectations are realistic.

If you have a diversified portfolio, you’re going to outperform the worst asset class but under perform the best. With that in mind, don’t look at just your pure rate of return. You don’t have to be in the year’s highest flying mutual funds and stocks to succeed.

Instead, you and your advisor should quantify your goals when creating your financial plan.

That plan should include periodic, realistic mileposts to check your progress against. If your net worth isn’t growing as fast as you’d forecast, examine why. Maybe it was just a down year in the market. Or maybe you’ve been too cautions with your investments and need to make a change.

What does your gut say? Can you stomach the investment risk they’re taking?

The real key is to remain invested.

Some discomfort is normal. You’re not going to gain anything without taking risks. But if you’re so nervous about the risk you’re taking that you cannot stay invested, you need to talk to your advisor. If you’re always buying at the top and selling at the bottom, you won’t build wealth.

You also should pay attention if your gut feeling is telling you that your advisor isn’t being honest with you.

If it doesn’t feel right, it probably isn’t. If your advisor doesn’t listen to you, doesn’t return your phone calls, does some kind of trading in your account that you didn’t know about, you need to raise your hand and say something.

Have you been following the advice?

If you haven’t put your plan into practice, what’s stopping you? If it is because the suggestions are too complex, and you don’t understand them or they make you uncomfortable, talk to your advisor.

Why pay for counsel you’re not going to use? If your planner won’t listen, you may need to hire someone else.

Is the advice clear to you?

I really believe that the way an advisor speaks to a client is very important. Sometimes people who aren’t confident about something use lingo to make themselves appear to be an expert.

Also, it’s crucial for you to understand the money moves you are making – and why you’re making them.

We need to be responsible for our financial futures. If you abdicate responsibility and say ‘So-and-so will take care of it’ you may find out when it is too late that so-and-so wasn’t taking care of it.

Is your advisor a good listener?

Responsiveness is a key thing. Many people have questions. Are you getting good answers to those questions?

I would be concerned if an accountant said ‘don’t worry about those details. Just trust me.’ People are entitled to understand what they are doing and why.

You should feel comfortable enough with your advisor to ask anything.

Most of us don’t want to embarrass ourselves or admit we don’t understand something, but it’s very important to feel OK saying ‘I don’t have a clue what you’re talking about.’

Source: CPA Site Solutions

Like dandelions in a spring lawn, credit card offers pop up everywhere--stuffing your mailbox, flashing on the Internet, even falling from the magazines in your doctor's waiting room. And they all sound so attractive. "0% APR until next year!" "No fee if you transfer a balance now!" "Low fixed rate!"

You're thinking of applying for a card, but how do you decide which offer is best for you?

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Source: Federal Reserve Board

How do I determine my long-term financial goals?

Together with your spouse or other family members, decide – realistically – what you want to achieve financially. These will vary from family to family. Goals might include: early retirement, travel, a vacation home, securing your family’s financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

Is there any validity to financial planning "rules of thumb"—such as "saving 10% of your gross income" or "needing 80% of your pre-retirement income to retire comfortably"?

The following rules of thumb may work for some people. But they do not make financial sense for everyone. What’s important is to be able to know whether a rule suits your situation. Here are some of those rules, and some considerations that should not be overlooked.

"Your life insurance should equal five times your yearly salary." This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you in particular need to buy. The amount you need will depend on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and other factors.

Save 10% of your salary per year. You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life—in their 40s—need to save at least 15 or 20% per year.

Contribute as much as you can to retirement plans. This makes sense for most people, but if you’ve accumulated a large amount of money in a retirement plan—close to a million dollars—you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.

You need 80% of your pre-retirement income to retire comfortably. Although people may need 80% of your salary during the first few years of retirement, later on they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and on other factors.

Subtract your age from 100, and invest that percentage in stocks. This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating your investments among various types of investments depends on your investment goals and needs, and your willingness to risk your capital. In this case, rules of thumb do not serve the investor at all.

Maintain an emergency fund of six months’ worth of expenses. Depending on your family’s situation, three months’ worth of expenses might be enough of an emergency fund; or six months’ worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short term loan, and how much money you have in savings and investments, among other things.

Tip: Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and calculate what you’ll need to do to fulfill them.

What do women in particular need to keep in mind with regard to financial planning?

A recent survey done by a Midwestern bank of 208 women revealed the following about the survey participants, who were all age 30 or older, and all or whom had incomes of at least $40,000.

  • The median amount of monthly savings the women in the survey said was adequate was $475 – much less than what is needed to live out a comfortable retirement.
  • 79% of the women said their investment style was moderate or conservative, as opposed to aggressive—yet some aggressiveness in investing is necessary to stay ahead of inflation.
  • 31% of the women do not have a will, yet 49% believe their finances will be in order if they die unexpectedly.
  • 26% said they have a poor or only fair understanding of their parents' wishes—making them ill-prepared to deal with the death of a parent.

What special problems do unmarried couples have to be concerned with in financial and estate planning?

Because the law grants certain benefits and favors to married couples and not to unmarried couples, the latter must take certain steps in precautions in taking care of their financial planning needs.

Here is an overview of the special considerations and problems that apply to unmarried couples, and what can be done about them. It is a good idea to seek out the aid of legal and financial professionals who are familiar with the issues faced by family units in which there is no legal marriage.

They do not automatically inherit each other’s property. Married couples who do not have a will have the state intestacy laws to back them up: unmarried couples must have a will to see that their wishes are met.

They do not have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, such as a living will, you may not have the right to do so.

They do not have the right to manage each other’s finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple. Unmarried couples can also mitigate this problem by owning some property jointly.

© CPA Site Solutions

It may not be easy easy, but single parents can keep their families economically stable.

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How do I determine my long-term financial goals?

Together with your spouse or other family members, decide – realistically – what you want to achieve financially. These will vary from family to family. Goals might include: early retirement, travel, a vacation home, securing your family’s financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

Is there any validity to financial planning "rules of thumb"—such as "saving 10% of your gross income" or "needing 80% of your pre-retirement income to retire comfortably"?

The following rules of thumb may work for some people. But they do not make financial sense for everyone. What’s important is to be able to know whether a rule suits your situation. Here are some of those rules, and some considerations that should not be overlooked.

"Your life insurance should equal five times your yearly salary." This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you in particular need to buy. The amount you need will depend on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and other factors.

Save 10% of your salary per year. You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life—in their 40s—need to save at least 15 or 20% per year.

Contribute as much as you can to retirement plans. This makes sense for most people, but if you’ve accumulated a large amount of money in a retirement plan—close to a million dollars—you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.

You need 80% of your pre-retirement income to retire comfortably. Although people may need 80% of your salary during the first few years of retirement, later on they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and on other factors.

Subtract your age from 100, and invest that percentage in stocks. This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating your investments among various types of investments depends on your investment goals and needs, and your willingness to risk your capital. In this case, rules of thumb do not serve the investor at all.

Maintain an emergency fund of six months’ worth of expenses. Depending on your family’s situation, three months’ worth of expenses might be enough of an emergency fund; or six months’ worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short term loan, and how much money you have in savings and investments, among other things.

Tip: Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and calculate what you’ll need to do to fulfill them.

What do women in particular need to keep in mind with regard to financial planning?

A recent survey done by a Midwestern bank of 208 women revealed the following about the survey participants, who were all age 30 or older, and all or whom had incomes of at least $40,000.

  • The median amount of monthly savings the women in the survey said was adequate was $475 – much less than what is needed to live out a comfortable retirement.
  • 79% of the women said their investment style was moderate or conservative, as opposed to aggressive—yet some aggressiveness in investing is necessary to stay ahead of inflation.
  • 31% of the women do not have a will, yet 49% believe their finances will be in order if they die unexpectedly.
  • 26% said they have a poor or only fair understanding of their parents' wishes—making them ill-prepared to deal with the death of a parent.

What special problems do unmarried couples have to be concerned with in financial and estate planning?

Because the law grants certain benefits and favors to married couples and not to unmarried couples, the latter must take certain steps in precautions in taking care of their financial planning needs.

Here is an overview of the special considerations and problems that apply to unmarried couples, and what can be done about them. It is a good idea to seek out the aid of legal and financial professionals who are familiar with the issues faced by family units in which there is no legal marriage.

They do not automatically inherit each other’s property. Married couples who do not have a will have the state intestacy laws to back them up: unmarried couples must have a will to see that their wishes are met.

They do not have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, such as a living will, you may not have the right to do so.

They do not have the right to manage each other’s finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple. Unmarried couples can also mitigate this problem by owning some property jointly.

© CPA Site Solutions

Managing your monthly budget can be difficult and frustrating. One of the most important aspects of controlling your budget is to determine where your money is going. This calculator helps you do just that.

By entering your income and monthly expenditures, you can see how much you have left to save and where your money is being spent. In addition, you can click the "View Report" button to compare your budget breakdown to our targets, which can help identify areas for improvement.

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CPA Site Solutions

What's good about investing in IRAs?

There are Roth IRAs and Traditional IRAs, both of which are discussed in the Financial Guide listed below. All IRAs defer taxation of investment income until funds are withdrawn. Contributions to Traditional IRAs in many cases are deductible; withdrawals from Traditional IRAs are taxable income, except for withdrawal of previously non-deductible contributions.

Can anyone have a traditional IRA?

If you have income from wages or self-employment income, you can contribute up to $4,000 in 2005-7, higher in later years. Thus, they are available even to children who meet these conditions.

Can my homemaker spouse have an IRA?

Yes. Contributions of $4,000 for each spouse are allowed if the couple’s wages or self-employment earnings are $8,000 or more. This rises to higher amounts after 2007.

What makes Roth IRAs so special?

Roth IRAs offer the following advantages:

  • Withdrawals—if they qualify—are completely exempt from income tax, unlike all other retirement plans.
  • Many can quickly build up their Roth IRA accounts by converting traditional IRAs into Roth IRAs—at a tax cost.
  • Since you need not withdraw from your Roth IRA at any age, more can be passed on to heirs than would be allowed under other plans.

Can anyone have a Roth IRA?

Not everyone can have a Roth IRA. The following conditions apply:

  • You can’t contribute to a Roth IRA for a year with income above $110,000 if single or $160,000 on a joint return.
  • You can’t convert a traditional to a Roth IRA with income above $100,000 (single or joint return).
  • You must have earnings from personal services—$4,000 or more to make the (maximum) contribution - though an additional contribution of $1,000 is allowed persons age 50 and over. The $4,000 amount for earnings and contributions rises higher after 2007.

Can I set up a Roth IRA for my spouse?

Yes, subject to the income conditions above. This allows contributions of $4,000 each if the couple’s earnings are at least $8,000 after 2004; higher amounts after 2007.

Can I set up a Roth IRA for my child?

Yes, for a child with personal service earnings, and subject to the other income conditions.

What's the downside to Roth IRAs?

The following is a brief list of negative issues regarding Roth IRAs:

  • There’s never a deduction for Roth IRA contributions.
  • To build a sizable Roth IRA fund, you must convert a traditional IRA (or, after 2007, funds form an employer plan). Conversions are taxable.
  • In converting to a Roth IRA, you risk an excess contribution penalty and an early withdrawal penalty, if income exceeds $100,000.

What can I do if I converted to a Roth IRA and my income exceeds $100,000?

You can "re-characterize" your Roth IRA to a Traditional IRA (with suitable paperwork). This eliminates the Roth IRA and the tax. The deadline is the tax return due date including extensions.

What if my Roth IRA assets fall in value after conversion?

You can re-characterize as in the preceding answer, so you don’t pay tax on asset values you no longer have.

How are my heirs taxed on inherited Roth IRA wealth?

Your heirs are taxed as follows:

  • No income tax whatever, if the funds have been in the Roth IRA at least 5 years.
  • The heir can spread the withdrawal over his or her life, continuing the tax shelter for amounts not withdrawn.
  • Estate tax treatment is the same as for traditional IRAs.

When shall I use a rollover to my IRA?

That depends on your particular needs and circumstances. Here are some reasons you might want to roll over distributions to your IRA:

  1. You want to, or have to, take a distribution from your employer’s plan and want these funds to continue to grow tax-free in your own IRA.
  2. As a self-employed, you are terminating your Keogh plan or retiring from business and want to continue the tax shelter for these distributions.
  3. You are the beneficiary of a deceased person's retirement plan and want to continue the tax shelter for these distributions in your own IRA.

Is there a downside to an IRA rollover?

Here are some of the disadvantages of an IRA rollover:

  1. Rollovers from company or Keogh plans may take away your spouse’s right to share in plan assets.
  2. IRAs can’t claim the limited tax relief allowed on lump-sum distributions.

Tip: To avoid tax hassles, rollovers should be done between the trustees of the plans involved, and not as a do-it-yourself.

© CPA Site Solutions

When seeking legal aid, as in purchasing any product or service, it’s important to be a smart consumer: to be well informed and to know exactly what you are getting for your money. This Financial Guide discusses how to find an attorney who will provide cost-effective help with your legal problems.


This Financial Guide gives you a roadmap to the process of finding a good lawyer and making sure that the legal services you are getting are cost-effective. Before hiring an attorney, take the following steps.

Step 1: Decide Whether You Need A Lawyer

You hire a lawyer to help you resolve disputes, engage in legal transactions, or assert your legal rights. For certain legally complex or time-consuming disputes or problems, there is no doubt that a lawyer is necessary. For example, if you want a will prepared, or a more complex business deal handled, you will need a lawyer. Or if a court case is involved (other than a simple, routine matter), you’ll almost always need a lawyer. There may, however, be ways to resolve a problem or dispute without the specialized assistance of a lawyer.

In deciding whether to hire a lawyer, consider the following:

  • Does the matter involve a complex legal issue, or is it likely to go to court? These two factors indicate you need a lawyer.
  • Is a form or self-help book available that you can use instead of hiring a lawyer? You may be able to solve certain problems with no legal help or with only minimal assistance.
  • Is a large amount of money, property, or time involved? These factors indicate you need a lawyer.
  • Are there any non-lawyer legal resources available to assist you (such as mediation, arbitration, or small claims court)?

Mediation or Arbitration

Dispute resolution centers have been established in almost all states. The American Bar Association's Section on Dispute Resolution estimates that there are currently more than 450 community dispute resolution centers and more than 1,200 court-related dispute resolution programs throughout the country. While the centers vary, most specialize in helping to resolve problems in the areas of consumer complaints, landlord/tenant disputes, and disagreements between neighbors or family members.

The names, services, and fees (if any) of the centers vary from place to place, but they generally use two different processes to resolve problems: mediation and arbitration. Mediation involves a neutral person who assists the two sides to discuss their differences and possibly reach an agreement. In arbitration, the neutral third party conducts a more formal process and makes a decision (usually written) after listening to both sides.

If both parties can agree to it, using a dispute resolution center (sometimes called a community justice center) or a private mediation center can be a low-cost alternative to bringing a suit in court or hiring an attorney to represent you in a negotiation. In some areas, the court itself may refer certain types of cases to a mediation program.

Small Claims Court

Small claims court may be appropriate if you have a monetary claim for damages within the limits set by your state (usually $1,000 to $5,000). These courts are more informal and involve less paperwork than regular courts. The filing costs are low and the system is faster than the regular court system. If you file in small claims court, be prepared to act as your own attorney, gather the needed evidence, research the law, and present your story in court.

Are you willing to collect information and do research on your own? Is there a time limit on when you must file suit? Ask the small claims court clerk or look it up in your local law library. You must file your case before this time limit (usually within a year). Are you able to prove that the person against whom you are making the claim owes you money? You must be able to prove legal liability and that you have suffered a financial loss as the result of someone else's action.

In deciding whether to use small claims court, check the many "how-to" books in the library for general information. Check with the clerk in the small claims court, local consumer agency, or legal aid office for more information in your area.

Step 2: Get Some Names

Once you have decided you need a lawyer, it’s time to begin shopping around. The first step is to compile a list of names. The recommendation of someone whose judgment you trust is an excellent place to start your search. You may want to begin by asking relatives, friends, clergy, social workers, or your doctor for recommendations. Often those persons can refer you to someone who has provided similar legal services for them. You need to know more about the lawyer than simply that he or she is a good attorney. Ask those making the recommendation for specific information about the type of legal help the lawyer provided them and how their case was handled.

Bar Association Referral Lists

Many state and local bar associations maintain lawyer referral lists by specialty. A referral service will provide you with the name of an attorney who specializes in the area you need. Keep in mind, however, that a referral is not a recommendation and does not guarantee a level of experience. Bar associations may charge participating lawyers and law firms a fee to be included on the referral list.

Caution: Many bar associations have committees that conduct training or public service work in specialized areas. An attorney serving on one of these committees could have the expertise you are looking for.

Tip: If you use a referral service, ask how attorneys are chosen to be listed with that particular service. Many services make referrals to all lawyers who are members (regardless of type and level of experience) of a particular organization.

Other Resources

Two of the larger lawyer directories are probably available at your local library. The Martindale Hubbell Law Directory lists 600,000 American and Canadian lawyers alphabetically by state and by categories. Each entry has a biography, with information on each lawyer's education, specialty, law firm, and the date of admittance to the bar. It also includes a "rating" based on information supplied by fellow lawyers. The Who's Who in American Law directory lists about 24,000 lawyers and includes biographical notes. This directory is somewhat difficult to use because the lawyers are listed alphabetically rather than by state or specific area of expertise.

Many communities also have other lawyer referral services to assist people in finding a lawyer. Often the services are for specific groups such as persons with disabilities, older persons, or victims of domestic violence. Groups that may be good sources for a local referral include the Alzheimer's Association and other support groups for specific diseases, such as Children of Aging Parents, the Older Women's League, the state civil liberties union, a local social services agency, or the local agency on aging.

Other referral services may be financed by a few lawyers who receive all the referrals. Some services may screen the lawyers who wish to have referrals in a particular area.

Lawyers are permitted to advertise within specific guidelines. You will be able to gather some useful information from ads. However, as with any advertisement, take everything with a grain of salt.

Many attorneys specializing in areas of the law in which there may be substantial fees--such as personal injury or medical malpractice--advertise free consultations. Advertisements may list a set fee for a particular type of case. Many attorneys who do not advertise may also provide free consultations or offer set fees for a certain legal problem.

Caution: Keep in mind that set fees are usually for routine, uncomplicated cases. Your case may not be regarded as simple.

In addition, the court and your banker may be good referral sources. Finally, the yellow pages of the telephone book often lists lawyers according to their specialties.

Step 3: Start Asking Questions

To start the process of hiring a lawyer, call several lawyers to whom you have been referred or about whom you have heard. Ask them the preliminary questions listed below before committing yourself to a consultation. The answers you get will help you choose the two or three lawyers you wish to interview.

Since this is only a preliminary telephone conversation, ask questions that can be answered briefly. Here are some questions to ask:

  • Will you provide a free consultation for the initial interview?
  • How long have you been in practice?
  • What percentage of your cases are similar to my type of legal problem? (A lawyer with experience in handling cases like yours will be more efficient, which may save you money.)
  • Can you provide me with any references, such as trust officers in banks, other attorneys, or clients?
  • Do you represent any clients or special-interest groups that might cause a conflict of interest?
  • What type of fee arrangement do you require? Are the fees negotiable?
  • What type of information should I bring with me to the initial consultation?

Follow up your phone calls by scheduling interviews with at least two of the attorneys. Don't feel embarrassed about selecting only the best candidates or canceling appointments with some of the attorneys after you complete all of your exploratory calls.

Step 4: Interview The Candidates

A personal interview is absolutely necessary. Whether you want a lawyer for a single transaction or over a period of years, you will be sharing details of your life and relying upon this person's expertise and advice. Since the lawyer will act on your behalf, it is critical that you feel comfortable with your attorney and that your will function in an atmosphere of mutual respect. A personal interview is the best way to make this judgment.

Come prepared with a brief summary of your immediate case (including dates and facts) as well as a list of general questions for the attorney.

The purpose of the interview is twofold: (1) to decide if the attorney has the necessary experience and is available to take your case; and, (2) to decide if you are comfortable with the fee arrangement and, most importantly, comfortable working with the attorney.

Since this an initial consultation, it may not be a lengthy one. Be concise and approach the interview in a businesslike manner. Be prepared to take notes, to listen carefully to the attorney, and to make observations about the office and how it is run.

Bring to the interview:

  • A brief, written summary of your case
  • A list of questions for the attorney
  • Cards or a small notebook
  • A pen/pencil for notes
  • Copies of any notices you have received

In addition to any unanswered questions from the telephone calls, you may want to consider asking the following questions:

  • How long has this attorney worked on cases like yours?
  • Based on your brief description of the problem, ask about the range of outcomes you could expect (rough estimate of length of time, cost for legal services, and size of the award if any). Ask if the case is likely to be settled or will it go to trial.

    Caution: Many factors affect how a case is decided. If the attorney gives you an ironclad promise that you will win, a red flag should go up.

  • Ask for an opinion of the strengths and weaknesses of a case like yours. This should be based on your lawyer's experience with similar cases.
  • Ask who will be working on your case. Will this attorney be doing all of the research, case preparation, negotiation, and court work, or will associates or non-attorney advocates be handling parts of it? What are the experience and expertise of these other advocates? Will other experts, including other attorneys, be consulted? If so, who will they be? If others will work on the case, what will the fee arrangement be? (These questions are particularly important to ask of attorneys practicing in large law firms where work is often delegated to associates and/or paralegals.)
  • Ask about fees and expenses. These are not the same. An attorney's fee is the payment you make for the attorney's time. Expenses refer to a variety of other costs including witness fees, court filing fees, copying, messenger service, etc. (See the question on fees below.)
  • Ask if the attorney will work out a written fee agreement with you. (The specifics of the arrangement should be in writing.)
  • Ask how often the attorney will bill you; is a retainer required?
  • Decide what type of involvement in the case you want. Ask if the attorney is comfortable with that level of involvement. (See the questions below on client involvement and cutting costs.)
  • Find out what hours the attorney will be available for meetings. This may be particularly important if you must leave work to meet with the attorney. Will you meet in the evening or on weekends? Will the attorney visit your home, if needed?

Observe how the attorney responds to your questions. Does he or she seem organized (take notes, etc.)? Respond openly and directly to your questions? Provide you with written background material on the topics of interest to you? Provide clear explanations?

Observe the physical surroundings and office staff. Is the staff friendly? Are they responsive? Do people identify themselves on the telephone so you know to whom you are speaking? Does anyone explain the roles of people with whom you may be dealing? Is the pace frenetic, lackadaisical, or busy in an organized fashion?

Observe your attorney during the preliminary interview to see whether he or she fits the bill:

  • Neatness counts. Does the attorney appear neat and clean?
  • Timeliness. You should not be kept waiting for your appointment.
  • Focus. Does the attorney leave the room frequently during your appointment? Does he or she take phone calls? You should be getting his complete attention. Does the attorney listen attentively, or does he or she appear bored or distracted, or glance at his or her watch?
  • Openness about fees. An attorney who does not discuss fee arrangements up front may be more likely to surprise you with large, unexpected bills. The fee should be discussed at the first interview.

Step 5: Make Your Decision

After the interviews, review your notes. Look at the strengths and weaknesses of each attorney you interviewed. Decide what is most important to you. Factors to consider in choosing an attorney include:

  • Cost. Cost is rarely the only deciding factor unless it is a simple case which will take little time and that is the only contact you plan to have with the attorney. However, it is critical that you feel comfortable and knowledgeable about the financial arrangement. Disputes over fees are one of the most common conflicts between clients and attorneys.
  • Experience. Does the attorney have the necessary experience for the case you have? For a simple will, a relatively new attorney may be a cost-effective choice. However, for a complex estate plan, you need someone with more experience. The higher fee is likely to be balanced by not having to pay for the attorney to learn on the job.
  • Availability. Can the attorney accept the case immediately? Will the attorney be able to devote the time you want to the case? This is particularly important if you prefer a lot of interaction with your attorney.
  • Your Comfort Level/Mutual Respect. It is important not to choose an attorney simply because you are impressed by the firm's reputation. You should be satisfied with the expertise of the people actually working on your case. Will you trust them enough to tell them private matters relevant to the case that you may not have shared with others? Do you believe the attorney treats your ideas and opinions with respect?

Step 6: Clarify Fee Arrangements and Similar Issues

Fees are one of the least discussed parts of any legal case, yet are highly important to both client and lawyer. Frequently fees are not discussed early enough, candidly enough, or in enough detail. Why? Generally, the discussion can be uncomfortable for both parties. However, becoming knowledgeable about the types of fee arrangements can increase your comfort level in dealing with this crucial part of hiring an attorney.

Tip: Remember: The specifics of a fee arrangement should be in writing.

The market rate for any given legal service varies by locality. A "fair" fee is what seems fair to you, based on your knowledge of going rates. Whether you are comfortable with a fee is likely to be based on the following factors:

  • How much you can afford
  • Whether the case is routine or requires special expertise
  • The range of attorney rates for this type of case in your area

The fee arrangement you make with your lawyer will significant affect how much you will pay for the services.

Types Of Fee Arrangements

Here are several common types of fee arrangements used by lawyers:

Flat fee. The lawyer will charge you a specific total fee for your case. A flat fee is usually offered only if your case is relatively simple or routine.

Tip: Ask if photocopying, typing, and other out-of-pocket expenses are covered by this flat fee. Often the total bill is the flat fee plus these out-of-pocket expenses.

Hourly rate. The attorney will charge you for each hour (or portion of an hour) that he or she works on your case. If your attorney's fee is $100 per hour, and he or she works ten hours, the cost will be $1,000. Some attorneys charge a higher rate for court work and less per hour for research or case preparation.

Tip: If you agree to an hourly rate, be sure to find out how much experience your attorney has had with your type of case. A less experienced attorney will usually require more time to research your case, although he or she may charge a lower hourly rate.

Large law firms usually charge more than small law firms and urban attorneys often charge more per hour than attorneys practicing in rural areas.

Tip: Ask what is included in the hourly rate. If other staff such as secretaries, messengers, paralegals, and law clerks will be working on your case, find out how their time will be charged to you. Ask about costs and out-of-pocket expenses, which are usually billed in addition to the hourly rate.

Contingency fee. Under this arrangement, the attorney's fee is based on a percentage of what you are awarded in the case. If you lose the case, the attorney does not get a fee, although you will still have to pay expenses. The contingency fee percentage varies and some lawyers offer a sliding scale based on how far along the case is when it is settled. A one-third fee is common.

A contingency fee is usually found in personal injury cases, accidental claims, property damage cases, or other cases where a large amount of money is involved.

Referral fee. On occasion, an attorney who has accepted your case may refer you to another attorney who specializes in the area you need. Sometimes the first attorney will ask for a portion of the total fee you pay for the case. This "referral fee" may be prohibited under state codes of professional responsibility unless certain rules are followed. The rules usually include a requirement that client fees be split only if each attorney does some work, the client knows about the arrangement, and the total fee is reasonable.

Suggestions for Ensuring Cost Effectiveness

It is important to remember that a lawyer's fees are often negotiable. Your lawyer is unlikely to invite you to bargain over fees, and you may not want to bring the subject up. Keep in mind, however, that there are some situations in which attorneys are more likely to consider a lower fee. If your case is interesting, unique, or extremely lucrative, an attorney may be willing to negotiate. If the firm is actively seeking more work or is new to your locality, it may handle a case for less as a way to build its caseload.

There are two general situations in which you may wish to raise the issue of lower fees. First, if your case has the possibility of significant attorney's fees, you are in a stronger position if you are willing to shop around and to negotiate. It's wise to negotiate, for example, in personal injury cases. Most lawyers will propose a standard contingency fee for one-third of any damages that they win for you, nothing if they lose.

Tip: The contingency fee is designed to cover the risk the lawyer is taking; yet some experts estimate that at least one out of every five contingency fee cases involves virtually no risk.

It makes sense to sit down with several different lawyers before choosing one. Ask each to assess the merits of the case and the likelihood that you will receive money if you are successful. The consultations will be free and you will come away with a more realistic sense of what fee arrangements you should agree to. Generally, the higher the likelihood of success in a case, the lower the contingency percentage you may be able to negotiate. Some clients also prefer to pay their lawyers on a sliding scale. For example, 33 percent for the first $100,000 in damages, 25 percent for the next $100,000, and 15 percent above that.

You may be able to negotiate other arrangements that will save you money, including flat fees instead of hourly charges, hourly rates up to a prearranged maximum for the entire project, and fees based partly on the outcome.

Comparison Shop for Flat Fees on Simple Cases

When you need a simple transaction like a will, a real estate closing, or a power of attorney, you can comparison shop. Contracting for legal services is like any other consumer transaction in that the prices and the work product vary. Call several attorneys and compare their answers to the questions listed above. Only after you get a sense of the range of fees will you be able to determine which rate and which attorney best suit you and your budget.

Ask About Billing Method for Hourly Rates

A written agreement specifying the fee arrangement and the work involved is the best way of assuring clear communication between you and your attorney about the total cost of the case.

Tip: In some cases, it may save hundreds of dollars if you ask a lawyer to bill at 6-minute instead of 15-minute intervals. For example, if a lawyer's minimum billing unit is 15 minutes, each 5-minute phone call will be billed at one-fourth of the hourly rate. At 6-minute phone intervals, a 5-minute phone call costs just one-tenth of the hourly rate.

Choose a Lawyer with the Appropriate Qualifications

Most legal work is relatively routine. It often has little to do with complex legal theory or analysis, and much more to do with knowing which form to fill out and which county clerk will process it most quickly. Smaller firms, attorneys charging lower rates, and less experienced attorneys are often well suited for the broad range of legal work needed by many consumers. Recently graduated attorneys may offer to work for a somewhat lower price to compensate for the extra risk and time involved in becoming familiar with the specific area of law. Lawyers who charge $300 an hour and up are appropriate for very sophisticated trusts and estate work, corporate litigation, or complex criminal defense work.

Tip: Be wary of big law firms where you may get the impression that the young associate who has been assigned to your case (at a lower rate) is being supervised closely by the senior partners listed in the firm name. The associate may take three or four times as long as an experienced lawyer to draft the necessary papers. You might want to meet with the associate and the supervising partner before work begins to ascertain who is going to do what, and to get an estimate as to how much the work should cost. Such a meeting may prevent the firm from charging you for an associate's on-the-job training.

Offer to Perform Some of the Work

Discuss ways that you can help the attorney on the case. For example, if the attorney needs copies of birth certificates or other records, you can write the letter to request them and save your attorney the time needed to dictate and process the letter.

Splitting the work with an attorney also can cut the cost of writing a will or health-care power of attorney or setting up a trust. You can draft the document, using a standard form as a guide, and then present it to your lawyer for reviewing and finalizing the work. Make sure that your attorney is willing to do this kind of work and discuss the fee if major rewriting is needed.

Hire the Attorney to Act as Go-Between

Some lawyers are open to negotiating a lower fee if you are only looking for their legal expertise to write a letter to the other side to settle. You may wish to hire the attorney for this type of limited assistance initially and follow up yourself. If you are unsuccessful, you may wish to retain the attorney to further pursue the case.

Hire the Attorney to Act as Your Pro Se Coach

If you want to represent yourself in court (called "appearing pro se"), hire your attorney to act as a pro se coach who will review documents and letters that you prepare and sign. The attorney may also help you prepare for a hearing in which you represent yourself. This might be appropriate when appearing in small claims court to enforce a lease or collect bills owed to you, for example.

Not all attorneys will be comfortable in this role, but some, especially in smaller firms, may be interested in empowering consumers.

Choose a Lawyer Who Specializes in What You Need

You are likely to save money by choosing someone who has the knowledge and office systems set up to handle cases like yours cost-effectively. That attorney is also more likely to be knowledgeable about specific procedures relating to your case, expert witnesses in the area, and other attorney experts for consultation.

Note: A rapidly growing specialty in the legal profession is "Elder Law," which includes traditional areas of legal practice such as estate planning and probate, as well as public benefits such as Medicare and Social Security, and issues such as planning for long-term care placement and health-care decision-making. Some attorneys have begun identifying themselves as elder law specialists. Most of these do not specialize in all of the areas covered by the broad term elder law. Therefore, you should ask which areas an attorney handles.

Prepare for Your Attorney Meetings

Come prepared with all of the necessary information and papers. Ask questions to make sure that you are providing everything the attorney needs. Think about your legal problem and gather the information your attorney will need. Write down the names, addresses, and phone numbers of other people involved in the case. Write down the important events or facts. Bring any relevant papers such as contracts, letters, court notices, or leases. Keep copies of this information and provide it to your attorney. The more work you do to prepare, the less time your attorney needs to spend and charge you for finding the information.

Answer Your Attorney's Questions Fully

Your communications to your attorney are confidential. Pay close attention to the questions your attorney asks you and offer complete and honest answers. If you are not sure if a piece of information is relevant, ask your attorney. If your attorney knows all the facts as early as possible in the case, it will save time and money that might be spent later on further investigation or misdirected case development.

If the Situation Changes, Tell Your Attorney as Soon as Possible

You are the primary source of information about your case and your attorney will act based on the information you have provided. If something happens or if you find out new information which may affect your case, give the information to your attorney quickly. It may change what he or she is doing on your case. It may save the attorney's time and your money or save the attorney from heading in the wrong direction on a case.

Maximize the Value of Your Contacts with Your Attorney

Keep in mind that you will pay for virtually every minute you spend with your attorney. Consolidate your questions or information-giving into a single call. Pass on information in writing or to other office staff rather than speaking directly with the attorney, unless you have a specific reason to do so.

Caution: While a friendly relationship can facilitate the handling of your case, limit phone calls and meetings to the business of the case. You do not want to pay for a long, friendly conversation about other matters.

Examine Your Bill

Request that your attorney bill you on a regular basis. Even if you have agreed on a contingency fee and will not actually pay the expenses until the case is settled, you should periodically examine the expenses. Question any items that you do not understand or that are not covered in your fee agreement.

Caution: Your attorney may list the cost of attending continuing legal education seminars in the area of your case. Unless you have agreed to cover these costs, you should question this entry.

Step 7: Define Your Relationship And Stay Involved

In films or television, a client simply tells the attorney of the problem and the attorney, without regard for expenses or further consultation, solves the case. In real life, a partnership is necessary. You must state, at the outset, your expectations on how much you want the attorney to consult with you and which decisions (if any) he or she can make without consulting you. You must also discuss the details of your legal costs in the case.

There are many variations of the attorney-client relationship, from full representation to having the attorney act as a "pro se coach."

The bottom line is that the outcome of the case affects you much more than it affects your attorney. No matter what role you envision for your attorney, you should be the decision-maker on all major points in your case. An attorney is hired for his or her experience on legal procedures and familiarity with the appropriate court system, but the more fully informed you are, the better prepared you will be to make the necessary key decisions and to oversee the work of your attorney.

At a minimum, educate yourself about the general area of law relevant to your case by reviewing one of the many self-help legal manuals and gathering information from the attorney interviews you conduct. You can find out about courtroom procedures from staff at the court (although they may be reluctant), legal aid staff, or the law library or your public library.

Further, you can support the attorney by gathering documents and performing other agreed upon tasks. It may be wise both financially and in terms of your staying involved in the case for you to undertake certain tasks to support the work on your case. There are various tasks in the development of any case which do not require specialized legal expertise, e.g., compiling information, researching regulations or company policy, obtaining birth certificates or other documents, or reviewing the factual portions of documents prepared for court.

In making the decision about the degree of your involvement, ask yourself the following questions:

  • How much time and effort can I realistically contribute?
  • How much do I need to control (monitor) the day-to-day direction of the case?
  • How familiar am I with this area of the law?
  • How much is this case worth to me (financially)?
  • How important is the outcome?

You will need to have clear agreement with your attorney about your relative roles and expectations. On one hand, your involvement should not hinder the attorney from exercising the expertise for which you hired the attorney. On the other, all options should be explained to you in clear language. Ask questions about the relative merits of a proposed step until you understand it.

Be wary of an attorney who makes strategic decisions without you, or who presents a proposed next step as necessary without explaining its merits and costs.

Here is a list of questions to be addressed, which can serve as a guideline:

  1. Do you want your attorney to act as pro se coach or as your representative? What work can you provide on the case? How frequently do you want to receive a billing (or a list of expenses if a contingency fee)?
  2. Do you want to review copies of pleadings (court papers) before they are filed? Receive copies after they are filed? Review some but not all documents? Which ones?
  3. How often is it appropriate to meet? What benchmark should trigger a meeting?
  4. How often do you want to talk to the attorney or receive a case update? Can staff convey the message? Will a short note be sufficient?
  5. Are there spending limits or benchmark figures for expenses or fees which should trigger a client consultation before going ahead on the case?

Elder Law

Many attorneys who specialize in the elder law area are familiar with the other professionals (such as ombudsmen, social workers, geriatric care managers, or other elder care professionals) who can provide related services to older people. They may also be trained in the mental and physical effects of the normal aging process.

What Elder Law Includes

The broad range of legal areas covered by "elder law" includes:

  • Estate planning, including the management of an estate during the person's lifetime and planning how the estate will be divided upon the person's death through wills, trusts, asset transfers, tax planning, and other methods.
  • Long-term care planning, including nursing home issues such as quality of care, admissions contracts, prevention of spousal impoverishment, and resident's rights. It also includes life care or retirement community issues such as evaluating the proposed plan/contract.
  • Retirement issues, including Social Security (retirement and disability and survivors' benefits) and other public pensions (veterans, civil service) and benefits as well as private pension benefits.
  • Health care issue, including Medicare, Medicaid, Medigap insurance, and long-term care insurance.
  • Housing issues, including home equity conversion and age discrimination.
  • Planning for possible incapacity, by choosing in advance how health care and financial decisions will be made if you are unable to do so (methods include durable powers of attorney, health-care powers of attorney, living wills, and other means of delegating the decision making). The attorney may also be able to advise on conservatorship and guardianship proceedings in the event that the elder has not planned for incapacity.
  • Age discrimination issues including bringing cases under the Age Discrimination in Employment Act.

Today most lawyers limit their practices to a few areas such as domestic relations, criminal law, personal injury, estate planning and probate, real estate, or tax issues. Even attorneys who list themselves as elder law specialists are unlikely to be expert in all the areas detailed above.

Do You Need An Elder Law Specialist?

The answer depends on your situation. If you already have a good working relationship with an attorney, discuss your particular legal needs with that attorney. Ask about your lawyer's experience in the issues typical of elder law. If the attorney is experienced in the areas of most concern to you, it is unlikely you will wish to go elsewhere. If the attorney is unfamiliar with elder law issues, ask the attorney for a referral.

Another reason you may want to seek out an elder law specialist is that finding the best solution is likely to involve a variety of other professionals such as physicians, home care agency workers, geriatric care managers, bank officers, and long-term care ombudsmen. An attorney familiar with this network can be very helpful. If needed, the attorney can act as a legal representative (fiduciary) if a client becomes incapacitated. Elder law specialists may work closely with financial planners, social workers, or geriatric care managers. This can be an advantage for many clients as a number of elder law issues involve both legal and non-legal solutions.

Note: It is always necessary to look for someone with the appropriate technical expertise and experience regardless of how the lawyer identifies himself or herself.

The National Academy of Elder Law Attorneys (NAELA) is a nonprofit professional association of attorneys specializing in legal issues affecting older persons. NAELA is not a legal referral service; however, it does sell a registry listing over 350 member attorneys nationwide ($25 including shipping and handling). National Academy of Elder Law Attorneys, Inc., 1604 N. Country Club Road, Tucson, AZ 85716, (602) 881-4005

The Area Agency on Aging

The Older Americans Act (OAA) requires your state office on aging to fund a local Area Agency on Aging (AAA) program that provides free legal help on non-criminal matters to people age 60 and over. Most of the over 644 local AAAs set aside funds to provide free legal assistance for those older persons who are in the greatest social and economic need. In many states, the AAAs contract with the Legal Services Corporation (LSC) funded programs described below. They may also set up their own programs or contract with private attorneys to provide legal services to older persons.

OAA legal services advocates provide representation in court or at administrative hearings, community education, and self-help publications. The OAA programs offer other types of assistance and services as well. For example, an advocate may assist an older person with a food stamp appeal and arrange for transportation to a nutrition site. The OAA legal services programs do a great deal of outreach to the community. Some attorneys spend as much as half of their time speaking at senior centers or visiting people in their own homes.

There are no income guidelines that clients must meet in order to qualify for services. However, the legal services provider and the Area Agency on Aging may set priorities about the preferred type of representation, such as obtaining government benefits, and may not be able to provide help in cases the agency considers to be a lower priority.

There is no cost to eligible clients. OAA legal services providers handle civil (not criminal) matters for persons age 60 or older regardless of income. Local offices set priorities for the types of cases they will handle. Not all cases can be handled.

Programs or offices providing free legal help to older persons can be identified by calling your local Area Agency on Aging listed in the government section of the telephone directory.

A national directory of OAA legal services providers (entitled Law & Aging Resource Guide) lists a state by-state breakdown of the addresses and phone numbers of each office and is available from the American Bar Association Commission on Legal Problems of the Elderly, 1800 M Street, NW, Suite 200, Washington, DC 20036, (202) 331-2297. Single state profiles are free. A complete copy of all state profiles is $20.

Other Sources of Legal Assistance For Senior Citizens

There are a number of sources of legal help for elderly people:

The Administration on Aging offers free pension counseling programs. It has offices in the following locations:

Region I- CT, MA, ME, NH, RI, VT: (617) 565-1158
Region II & III- NY, NJ, PR, VI, DC, DE,MD, PA, VA, WV: (212) 254-2976
Region IV - AL, FL, GA, KY, MS, NC, SC, TN: (404) 562-7600
Region V- IL, IN, MI, MN, OH, WI: (312) 353-3141
Region VI - AR, LA, OK, NM, TX: (214) 767-2971
Region VII - IA, KS, MO, NE: (816) 426-3511
Region VIII - CO, MT, UT, WY, ND, SD: (303) 844-2951
Region IX - CA, NV, AZ, HI, GU, CNMI, AS: (415) 437-8780
Region X - AK, ID, OR, WA: (206) 615-2298

The National Citizens' Coalition for Nursing Home Reform can locate an ombudsman in your area and provide general information on nursing homes.

1828 L Street, NW, Suite 801
Washington, DC 20036
Tel. (202) 332-2275

Legal Hot-Lines

In this section, we list publications helpful to those trying to find a lawyer and lists of sources for legal services for seniors and low-income people.

  • The American Association of Retired Persons (AARP) and the federal government's Administration on Aging (AoA) sponsor statewide legal hot-lines that provide legal advice to all persons age 60 or older, regardless of income or the nature of their problem. The hot-lines are staffed by attorneys who give advice, send pamphlets, or make referrals to special panels of attorneys or to legal services programs.

Most (including the AARP and AoA-funded hot-lines) do not charge for the advice given. Cases which require additional service are referred to special panels of attorneys who charge reduced fees or to free legal services programs.

Other Free Or Low-Cost Services

  • American College of Trust Estate Counsel has a national directory of lawyers specializing in estate planning.

3415 S. Sepulveda Blvd., Suite 460
Los Angeles, CA 90034
Tel. (310) 398-1888

  • U.S. Labor Department Pension and Welfare Benefits Administration Field offices offer free help with pension problems.
  • Atlanta area: (404) 302-3900
  • Boston area: (617) 565-9600
  • Chicago area: (312) 353-0900
  • Cincinnati area: (859) 578-4680
  • Dallas area: (972) 850-4500
  • Detroit area: (313) 226-7450
  • Kansas area: (816) 285-1800
  • Los Angeles area: (626) 229-1000
  • Miami area: (954) 424-4022
  • New York area: (212) 607-8600
  • Philadelphia area: (215) 861-5300
  • San Francisco area: (415) 625-2481
  • Seattle area: (206) 553-4244
  • Washington, DC area: (301) 713-2000
  • Source: CPA Site Solutions

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      What should I do if a friend or family member asks me to co-sign a loan?

      Many people agree to co-sign loans for friends or relatives, as a favor, as a vote of confidence, or because they just can't say no. Unfortunately, they often find that they've bitten off more than they intended to chew.

      The cosigner of a loan agrees to be responsible for its repayment along with the borrower. While a lender will generally seek repayment from the debtor first, it can go after the cosigner at any time. (On the other hand, where a loan is guaranteed, the lender can usually go after the guarantor only after the principal debtor has actually defaulted.)

      Finance companies report that most cosigners end up paying off the loans they've cosigned—along with late charges, legal fees and all. Not only is this an unwanted out-of-pocket expense, but it can also be an undeserved blot on the cosigner's credit record.

      It's better to guarantee a loan than to cosign it. However, if you're willing to cosign a loan, at least seek the lender's agreement to refrain collecting from you until the borrower actually defaults and try to limit your liability to the unpaid principal at the time of default. Then stay on top of the borrower's financial situation to help avoid a default (for example, have the lender notify you whenever a payment is late). At least you can preserve your credit rating by nipping payment problems in the bud.

      Cosigning An Account. You may be asked to cosign an account to allow someone else to obtain a loan. With cosigning, your payment history and assets are used to qualify the cosigner for the loan.

      Tip: We recommend that you do not cosign a loan, whether for a family member, friend, or employee. Many have found that cosigning a loan only leads to trouble.

      Bear in mind that cosigning a loan bears all the financial and legal consequences of taking out the loan yourself. When you cosign, you are signing a contract that makes you responsible for the entire debt. If the other cosigner does not pay, or makes late payments, it will probably show up on your credit record. If the person for whom you cosigned does not pay the loan, the collection company will be entitled to try to collect from you.

      If the cosigned loan is reported on your credit report, another lender will view the cosigned account as if it were your own debt. Further, if the information is correct, it will remain on your credit report for up to seven years.

      Tip: If someone asks you to cosign a loan, suggest other alternatives--such as a secured credit card—by which they can build a credit history. If you are asked to cosign for someone whose income is not high enough to qualify for a loan, you are actually doing them a favor by refusing—they will be less likely to be overwhelmed by too-high debts. At any rate, consult with your lawyer before cosigning, since state laws regarding a cosigner's liability vary.

      Tip: If you have already cosigned for someone, and he or she is not making payments on time, consider making the payments yourself and asking the cosigner to pay you directly, in order to protect your credit rating.

      How can I get the best deal on a home equity loan or an equity line of credit?

      If you decide to apply for a home equity loan, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan.

      Tip: The disclosed APR will not reflect the closing costs and other fees and charges, so compare these costs, as well as the APRs, among lenders.

      Interest Rates. Home equity plans typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). The interest rate will change, mirroring fluctuations in the index.

      To figure the interest rate that you will pay, most lenders add a margin, such as 2 percentage points, to the index value.

      Tip: Because the cost of borrowing is tied directly to the index rate, find out what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

      Sometimes lenders advertise a temporarily discounted rate for home equity loans—a rate that is unusually low and often lasts only for an introductory period, such as six months.

      Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable-rate plans limit how much your payment may increase, and also how low your interest rate may fall.

      Some lenders permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.

      Agreements generally permit the lender to freeze or reduce your credit line under certain circumstances, such as during any period the interest rate reaches the cap.

      What are the costs of obtaining a home equity line of credit?

      Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home.

      For example, these fees may be charged:

      • A fee for a property appraisal, which estimates the value of your home
      • An application fee, which may not be refundable if you are turned down for credit
      • Up-front charges, such as one or more points (one point equals one percent of the credit limit)
      • Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
      • Yearly membership or maintenance fees

      You also may be charged a transaction fee every time you draw on the credit line.

      You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed.

      On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit.

      The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

      Should I obtain a home equity line of credit or a traditional second mortgage loan?

      If you are thinking about a home equity line of credit you might also want to consider a traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

      Tip: Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

      In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

      Tip: Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line--the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

      How should I determine which of several loan alternatives is best?

      Use the legally-required disclosures of loan terms to compare the costs of home equity loans.

      The Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have this information.

      You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term has changed before the plan is opened (other than a variable-rate feature), the lender must return all fees if you decide not enter into the plan because of the changed term.

      Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you—in writing and before you sign any agreement—the finance charge and the annual percentage rate.

      The finance charge is the total dollar amount you pay to use credit. It includes interest costs, and other costs, such as service charges and some credit-related insurance premiums.

      For example, borrowing $100 for a year might cost you $10 in interest. If there were also a service charge of $1, the finance charge would be $11.

      The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

      Example: You borrow $100 for one year and pay a finance charge of $10. If you can keep the entire $100 for the whole year and then pay back $110 at the end of the year, you are paying an APR of 10 percent. But, if you repay the $100 and finance charge (a total of $110) in twelve equal monthly installments, you don't really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each month. In this case, the $10 charge for credit amounts to an APR of 18 percent.

      All creditors—banks, stores, car dealers, credit card companies, finance companies— must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure--before you sign a credit contract or use a credit card--so you can compare costs.

      Source: CPA Site Solutions

      While this calculator can't guarantee you will qualify for your new loan, it is a good check point to see if it is within your means.

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      Source: The Beehive

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      If you refinance your mortgage, the process will be similar to what you went through in obtaining the original mortgage. In reality, refinancing a mortgage is simply taking out a new mortgage. You will encounter many of the same procedures and the same types of costs the second time around. In this Financial Guide, we will give you some pointers on how to get the best possible deal.


        Who Can Benefit From Refinancing?

        Refinancing does not make good financial sense for everyone. A general rule of thumb is that refinancing is worth while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings. However, a rule of thumb is not ironclad: every individual’s circumstances need to be analyzed. If your loan amount and the particular circumstances warrant it, you might choose to refinance a loan that is only 1-1/2 percentage points higher than the current rate.

        Tip: Lenders may be offering zero point loans and low-cost refinancing. Therefore, even if your rate change is less than one percentage point, you may be able to save some money by refinancing.

        Most experts say that it takes at least three years to fully realize the savings from a lower interest rate, given the costs of the refinancing. You may find, however, that you could recoup the refinancing costs in a shorter time than three years. Again, every homeowner’s circumstances should be analyzed individually. Generally, refinancing can be a good idea if you:

        • Want to get out of a high interest rate loan to take advantage of lower rates. (This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.)
        • Want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM you currently have.
        • Want to build up equity more quickly by converting to a loan with a shorter term.
        • Want to draw on the equity built up in your home to get cash for a major purchase or for your children's education.
        • Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan in order to know exactly what the mortgage payment will be for the life of the loan.

        Tip: If you decide that refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing.

        How To Go About Making The Decision

        Talk to some lenders to determine the available rates and the costs associated with refinancing. These costs (explained further below) include appraisals, attorney's fees, and points. Once you know what the costs will be, determine what your new payment would be if you refinanced. You can then estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments.

        Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

        If you are thinking of refinancing an adjustable rate mortgage (ARM), you should also consider these questions:

        • Is the next interest rate adjustment on your existing loan likely to increase your monthly payments substantially? Will the new interest rate be two or three percentage points higher than the prevailing rates being offered for either fixed-rate loans or other ARMs?
        • If the current mortgage sets a cap on your monthly payments, are those payments large enough to pay off your loan by the end of the original term? Will refinancing to a new ARM or a fixed-rate loan enable you to pay your loan in full by the end of the term?

        You also might want to consider refinancing if you have an adjustable rate mortgage with high or no limits on interest rate increases. You might want to switch to a fixed-rate mortgage or to an adjustable rate mortgage that limits changes in the rate at each adjustment date as well as over the life of the loan.

        How To Determine Your Refinancing Costs

        When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With the new loan, you again pay most of the same costs you paid to get your original mortgage, including settlement costs, discount points, and other fees. You may also be charged a penalty for paying off your original loan early, called a prepayment penalty, if such a practice is not prohibited by your state.

        The total expense for refinancing a mortgage depends on the interest rate, number of points, and other costs required to obtain a loan. You should plan on paying an average of 3 to 6% of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist.

        Tip: When shopping for a lender, ask each one for a list of charges and costs you must pay at closing. Some lenders may require that some of these costs be paid at the time of application.

        The fees described below are the charges that you are most likely to encounter in a refinancing. (Some of the costs are expanded on in the paragraphs that follow.) Because costs may vary significantly from area to area and from lender to lender, the following chart should be regarded only as an estimate. Your actual closing costs may be higher or lower than the ranges indicated below.

        • Application Fee $ 75 to $300
        • Appraisal Fee $150 to 400
        • Survey Costs $125 to 300
        • Homeowners Hazard Insurance $300 to 600
        • Lenders Attorney’s Review Fees $75 to 200
        • Title Search & Title Insurance $450 to 600
        • Home Inspection Fees $175 to 350
        • Loan Origination Fees 1% of loan
        • Mortgage Insurance 0.5% to 1.0%
        • Points 1% to 3%

        Tip: To save on some of these costs, check with the lender who holds your current mortgage. The lender may be willing to waive some of them, especially if the work relating to the mortgage closing is still current (such as the fees for the title search, surveys, inspections, and so on).

        Let's consider some of these costs in greater depth:

        Application Fee. This charge imposed by your lender covers the initial costs of processing your loan request and checking your credit report.

        Title Search And Title Insurance. This charge will cover the cost of examining the public record to confirm ownership of the real estate. It also covers the cost of a policy, usually issued by a title insurance company, that insures the policy holder in a specific amount for any loss caused by discrepancies in the title to the property.

        Tip: Be sure to ask the title insurance company carrying the present policy if it can re-issue your policy at a re-issue rate. You could save up to 70% of what it would cost you for a new policy.

        Lender's Attorney's Review Fees. The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender. Settlements are conducted by lending institutions, title insurance companies, escrow companies, real estate brokers, and attorneys for the buyer and seller. In most situations, the person conducting the settlement is providing a service to the lender. You may also be required to pay for other legal services relating to your loan which are provided to the lender.

        Tip: You may want to retain your own attorney to represent you at all stages of the transaction, including settlement.

        Loan Origination Fees. The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan.

        Points. Points are prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals one % of the loan amount. For example, one point on a $75,000 loan would be $750. The total number of points a lender charges will depend on market conditions and the interest rate to be charged. To give you the lowest rate offered, most lenders will charge several points, and the total cost can run between three and six % of the total amount you borrow. For example, on a $100,000 mortgage, the lender might charge you between $3,000 and $6,000. However, some lenders may offer zero points at a higher interest rate, which may significantly reduce your initial costs, although your payments may be somewhat higher.

        Tip: In some cases, the points you pay can be financed by adding them to the loan amount. This means that the points will be added to your loan balance, and you will pay a finance charge on them. Although this may enable you to get the financing, it also will increase the amount of your monthly payments.

        Tip: To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly. The less time you keep the loan, the more expensive points become. If you plan to stay in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate.

        Appraisal Fee. This fee pays for an appraisal which is a supportable and defensible estimate or opinion of the value of the property.

        Prepayment Penalty. A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies by state, type of lender, and type of loan. Prepayment penalties are forbidden on various loans including loans from federally chartered credit unions, FHA and VA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a penalty for prepayment. In some loans, you may be charged interest for the full month in which you prepay your loan.

        Miscellaneous. Depending on the type of loan you have and other factors, another major expense you might face is the fee for a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance. There are a few other closing costs in addition to these.

        How Would Refinancing Affect Your Tax Situation?

        With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.

        Interest (points) paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance, unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the refinancing is for home improvements (or a portion of the loan is for this purpose) you may be able to deduct the points (or a portion of the points) under certain circumstances.

        If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a 15-year, fixed-rate mortgage. In this plan, your mortgage payments are somewhat higher than a longer-term loan, but you pay substantially less interest over the life of the loan and build equity more quickly. (Of course, this also means you have less interest to deduct on your income tax return.)

        Some Tips For Obtaining The Best Deal

        Here are some tips for getting the best deal on the refinancing of your mortgage:

        1. Shop Around

        If you decide to refinance your mortgage, shop around by calling several lending institutions to ask each one what interest and fees they charge will help you get the best deal available. Also ask each about their "annual percentage rate" (APR) and compare them. The APR will tell you the total credit costs of the refinancing, including interest, points, and other charges.

        Tip: You do not have to refinance your mortgage with the same lender that provided your original mortgage. However, to keep your business, some lenders will offer their original mortgage customers the incentive of lower mortgage interest rates, sometimes with reduced closing costs.

        2. Obtain a "Lock-In" or Guarantee

        If you decide to apply for refinancing with a particular lender, and if you do not want to let the interest rate float until closing, get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment, or lock-in, ensures that the lender will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the lender to put this information in writing, you may wish to choose one who will.

        Most lenders place a limit on the length of time (60 days for example) that they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, contact your loan officer periodically to check on the progress of your loan approval and to see if information is needed

        3. Review The Disclosure Form

        For a refinancing, the lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan, as required by the Truth in Lending Act. You usually will receive the information around the time of settlement, although some lenders provide it earlier. Review this statement carefully before you sign the loan. The disclosure tells you the APR, finance charge, amount financed, payment schedule, and other important credit terms.

        4. Be Aware Of Your Right To Rescind

        If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancellation notice, whichever occurs last.

        5. Find Out If The Application Fee Is Refundable

        When you apply for a mortgage, some lenders require you to pay a special charge to cover the costs of processing your application. The amount of this fee varies, but it may be $100 to $200. Usually, you must pay this charge at the time you file the application. Some lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.

        If you elect to cancel the transaction within three business days after you close the loan, as discussed above, you are entitled to a refund of all costs and charges imposed for the credit transaction.

        Tip: Before you apply for a mortgage, ask lenders whether they charge an application fee. If they do, find out how much it is and under what circumstances and to what extent it is refundable.

        *   *   *   *

        As you can see, many financial factors must be considered in refinancing a mortgage. Professional guidance is important in evaluating these factors.

        Sample Refinancing Savings

        The charts below illustrate the monthly and yearly differences in your mortgage payments if you refinanced to a 6 % or an 8 %, 30-year fixed-rate mortgage for $75,000. Remember, however, that the actual amount you may save by refinancing depends on many factors, such as your tax bracket and how long you plan to remain in your home.

        Your Present
        Mortgage Rate
        Current Monthly Payment Monthly Payment
        at 8%
        Monthly Difference in
        Payment at 8%
        Annual Difference in
        Payment at 8%
        9% 603 550 53 636
        9.5% 631 550 81 972
        10% 658 550 108 1296
        10.5% 686 550 136 1632
        11% 714 550 16 1968
        11.5% 743 550 193 2316
        12% 771 550 221 2652
                 
        Your Present Mortgage Rate Current Monthly Payment Monthly Payment at 6% Monthly Difference in Payment at 6% Annual Difference in Payment at 6%
        9% 603 450 153 1836
        9.5% 631 450 181 2172
        10% 658 450 208 2496
        10.5% 686 450 236 2832
        11% 714 450 264 3168
        11.5% 743 450 293 3516
        12% 771 450 321 3852

        Source: CPA Site Solutions

        1. Save As Much As You Can As Early As You Can.
          Though it's never too late to start, the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year's -- that's the power of compounding, and the best way to accumulate wealth.
        2. Set Realistic Goals.
          Project your retirement expenses based on your needs, not rules of thumb. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income.
        3. A 401(k) Is One Of The Easiest And Best Ways To Save For Retirement.
          Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and -- usually -- a matching contribution from your company.
        4. An IRA Can Also Give Your Savings A Tax-Advantaged Boost.
          Like a 401(k), IRAs offer huge tax breaks. There are two types: a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals, and, if you qualify, your contributions may be deductible; a Roth IRA, by contrast, doesn't allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals, but contributions are not deductible.
        5. Focus On Your Asset Allocation More Than On Individual Picks.
          How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns.
        6. Stocks Are Best For Long-Term Growth.
          Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg.
        7. Don't Move Too Heavily Into Bonds, Even In Retirement.
          Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation easily can erode the purchasing power of bonds' interest payments.
        8. Making Tax-Efficient Withdrawals Can Stretch The Life Of Your Nest Egg.
          Once you're retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible.  
        9. Working Part-Time In Retirement Can Help In More Ways Than One.
          Working keeps you socially engaged and reduces the amount of your nest egg you must withdraw annually once you retire.
        10. There Are Other Creative Ways To Get More Mileage Out Of Retirement Assets.
          You might consider relocating to an area with lower living expenses, or transforming the equity in your home into income by taking out a reverse mortgage.

        © CPA Site Solutions

        There are three types of reverse mortgage plans available today: (1) FHA-insured, (2) lender-insured, and (3) uninsured. This guide describes the similarities and differences among them and discusses the benefits and drawbacks of each. Since each plan differs slightly, it is important to choose the one that best meets your financial needs.

        The reverse mortgage is not without risk and negative aspects. Knowing the pros and cons will help you acquire the best possible deal should you decide to go with a reverse mortgage. Staying informed of your rights and responsibilities as a borrower may help to minimize your financial risks and avoid the threat of losing your home.


          How Does A Reverse Mortgage Work?

          A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home.

          The reverse mortgage’s benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

          Note: Reverse mortgages are now available in every state except Alaska, South Dakota and Texas. But willing lenders may still be scarce in some places.

          When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

          General Rules That Apply To Homeowners

          • To qualify for a reverse mortgage, you must own your home.
          • The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging.
          • Because you keep the title to your home, you are responsible for taxes, repairs, and maintenance.
          • Depending on the reverse-mortgage plan you choose, your reverse mortgage becomes due, with interest, when you move, sell your home, die, or reach the end of the selected loan term.
          • The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually paid off by refinancing it into a forward mortgage (assuming the heirs are eligible) or with the proceeds from the sale of the home.
          • A real benefit of reverse mortgages is that borrowers can live in their homes as long as they like, even after they have completely exhausted their equity. Borrowers must do their best to maintain the value of the home with diligent upkeep.

          How Payments Are Received

          Depending on the lender, borrowers can choose to receive monthly payments, a lump sum, a line of credit, or some combination.

          Tip: The line of credit offers the most flexibility by allowing homeowners to write checks on their equity when needed up to the limit of the loan

          A few reverse-mortgage programs guarantee monthly payments for life, even after the borrower no longer lives in the home.

          You can request a loan advance at closing that is substantially larger than the rest of your payments.

          Tax Rules

          The reverse mortgage payments you receive are nontaxable. Further, if you receive Social Security Supplemental Security Income, reverse mortgage payments do not affect your benefits, as long as you spend them within the month you receive them. This rule is also true for Medicaid benefits in most states.

          Tip: To find out the exact impact of reverse mortgage payments on benefits you are receiving, check with a benefits specialist at your local area agency on aging or legal services office.

          Interest on reverse mortgages is not deductible until you pay off your reverse mortgage debt.

          Maximum Loan Amounts

          Maximum loan amount limits are based on the value of the home, the borrower's age and life expectancy, the loan's interest rate, and whatever the lender's policies are. Maximums range (depending on the lender) from 50% to 75% of the home’s fair market value. The general rule is: The older the homeowner and the more valuable the home, the more money will be available.

          Example: A 65-year-old homeowner with a home worth $150,000 would be able to get a $30,000 lump sum or credit line. A 90-year-old homeowner with the same home could be eligible for as much as $94,000.

          All reverse mortgages have non-recourse clauses, meaning the debt cannot be more than the home’s value. Thus, the lender seeks repayment from heirs, family members, or the borrower's income or other assets.

          Negative Aspects

          Here are some of the downside aspects of reverse mortgages.

          You Incur A Large Amount of Interest Debt

          Reverse mortgages are rising-debt loans: The interest is added to the loan balance each month, since it is not paid currently, and the total interest you owe increases greatly over time as the interest compounds.

          Note: Some plans provide for fixed rate interest. Others have adjustable rates that change based on market conditions.

          Fewer Assets for Heirs

          Reverse mortgages use up the equity in your home, leaving fewer assets for you and your heirs.

          High Costs

          The high up-front costs of reverse mortgage make them less attractive. All three types of plans (FHA-insured, lender-insured, and uninsured) charge origination fees and closing costs. Insured plans also charge insurance premiums, and some plans charge mortgage servicing fees.

          Tip: If you are forced to move soon after taking the reverse mortgage (e.g., because of illness), you will almost certainly end up with a great deal less equity to live on than if you had simply sold the house. This is particularly true in the case of loans terminated in five years or less.

          Tip: Your lender may permit you to finance these costs, so that you won’t have to pay them up front. But they will be added to your loan amount. Because of the high up-front costs on all reverse mortgages, effective interest rates for short-term loans are out of this world.

          Adjustable Interest Rates

          With many reverse mortgage plans, interest rates are adjustable annually or monthly and tied to a public index, in some cases with limits on how far the rate can go up or down. Reverse mortgages with interest rates that adjust monthly have no limit. Bear in mind that the higher the rate, the faster your equity is used up.

          In order to give a fixed rate, one lender requires appreciation sharing, with which it gets a part of any increase in the home's value over and above the debt. Another lender offers percent of value pricing, collecting a fixed percentage of the home's value when the loan comes due. The latter option can be very expensive if the loan must be paid off after only a few years.

          Is A Reverse Mortgage For You?

          Although a reverse mortgage may be the answer for house-rich and cash-poor retirees, they are not for everyone. For instance, if you plan to move a few years down the road or there is a possibility you will have to move—e.g., due to illness—the reverse mortgage makes no sense. They make the most sense for those who plan to stay in their homes permanently. Also, if you already have a substantial mortgage on your home, the reverse mortgage is probably not for you, since you will have to pay it off before you can become eligible.

          If you want to pass your home to your children or heirs, the reverse mortgage is not a good alternative for you, since the lender will get most of the equity when the home is sold.

          Other Alternatives

          Besides the reverse mortgage, here are some alternatives to consider.

          • Programs that help with real estate taxes, repairs. Many state and local governments have programs that provide special purpose loans to seniors for (1) the deferral of property taxes and (2) making home repairs or improvements. These loans can often prevent retirees’ having to sell their homes. To find out whether your state has a special-purpose loan program for property taxes and/or for home repairs and improvements, contact your state agency on aging.
          • The qualified personal residence trust. If you want to pass your home to your children or other heirs, this option should be considered, especially if your home is worth a great deal and you want to remove it from your estate for estate tax purposes. The QPRT trust allows you to keep the home for a certain amount of time with ownership eventually passing to your heirs.
          • The sale-leaseback. You sell your home to your kids, and continue to live in it, paying them a fair market rent.

          Note: Do not arrange a sale-leaseback without professional guidance.

          How Federal Rules Help With Mortgage Shopping

          Reverse mortgages are complex financial transactions, and a lot of calculations are required to make sure you are getting a good deal.

          One of the best protections you have with reverse mortgages is the Federal Truth in Lending Act, which requires lenders to inform you about the plan's terms and costs. Be sure you understand them before signing. Among other information, lenders must disclose the Annual Percentage Rate (APR) and payment terms. On plans with adjustable rates, lenders must provide specific information about the variable rate feature. On plans with credit lines, lenders also must inform you of any charges to open and use the account, such as an appraisal, a credit report, or attorney’s fees.

          New rules require that total cost estimates illustrate at least three loan periods (short-term, life expectancy and long-term) and three likely appreciation rates (the predicted percentage increase in the home's value over the loan period).

          Armed with these estimates from several lenders, borrowers can more easily match programs to their needs and shop for the best mortgage value.

          A Summary Of Available Plans

          This section describes how the three types of reverse mortgages — (1) FHA-insured, (2) lender-insured, and (3) uninsured—vary according to their costs and terms. Although the FHA and lender-insured plans appear similar, important differences exist. This section also discusses advantages and drawbacks of each loan type.

          FHA-Insured

          This plan offers several payment options:

          • Monthly loan advances for a fixed term, or for as long as you live in the home
          • A line of credit
          • Monthly loan advances plus a line of credit

          This type of reverse mortgage is not due as long as you live in your home. With the line of credit option, you may draw amounts as you need them over time. Closing costs, a mortgage insurance premium, and, sometimes, a monthly servicing fee are required. Interest is at an adjustable rate on your loan balance. Interest rate changes do not affect the monthly payment, but rather how quickly your loan balance grows.

          The FHA-insured reverse mortgage allows you to change the way you are paid at little cost. This plan also protects you by guaranteeing that loan advances will continue to be made to you if a lender defaults. However, the downside of FHA-insured reverse mortgages is that they may provide smaller loan advances than lender-insured plans. Also, loan costs may be greater than with uninsured plans.

          The most widely available plan is the Federal Housing Administration's Government-insured Home Equity Conversion Mortgage (HECM) program. To qualify for an HECM loan, homeowners must be at least 62 and live in a single-family home or condominium that is their principal residence. Under this program, the amount of equity homeowners may borrow against depends on where they live, as well as on prevailing interest rates.

          For people who have more expensive homes or who need to borrow more, there are alternatives. A program from the Federal National Mortgage Association grants larger reverse mortgages on home equity.

          Tip: Most private reverse mortgages are not insured. Only the strength of the lender backs whatever promises it may make as to payments and other terms. So if you are looking to a reverse mortgage for future income, rather than a lump sum up front, you are better off in a federally insured program.

          Counseling is required before homeowners can apply for an HECM loan. This counseling allows homeowners to discover whether a reverse mortgage is really the best answer to their cash-flow problems.

          Tip: For an approved counselor, contact any HECM lender.

          Lender-Insured

          These reverse mortgages offer monthly loan advances or monthly loan advances plus a line of credit for as long as you live in your home. Interest may be assessed at a fixed rate or an adjustable rate, and additional loan costs can include a mortgage insurance premium (which may be fixed or variable) and other loan fees.

          Loan advances from a lender-insured plan may be larger than those provided by FHA insured plans. Lender-insured reverse mortgages also may allow you to mortgage less than the full value of your home, thus preserving home equity for later use by you or your heirs. However, these loans may involve greater loan costs than FHA insured, or uninsured loans. Higher costs mean that your loan balance grows faster, leaving you with less equity over time. Some lender-insured plans include an annuity that continues making monthly payments to you even if you sell your home and move.

          Tip: The security of these payments depends on the financial strength of the company providing them, so be sure to check the financial ratings of that company.

          Annuity payments may be taxable and affect your eligibility for Supplemental Security Income and Medicaid. These review annuity mortgages may also include additional charges based on increases in the value of your home during the term of your loan.

          Uninsured

          This reverse mortgage is dramatically different from FHA and lender-insured reverse mortgages. An uninsured plan provides monthly loan advances for a fixed term only—a definite number of years that you select when you first take out the loan. Your loan balance becomes due and payable when the loan advances stop. Interest is usually set at a fixed interest rate and no mortgage insurance premium is required.

          Tip:If you consider an uninsured reverse mortgage, think carefully about the amount of money you need monthly, how many years you may need the money, how you will repay the loan when it comes due, and how much remaining equity you will need after paying off the loan.

          If you have short-term but substantial cash needs, the uninsured reverse mortgage can provide a greater monthly advance than the other plans. However, because you must pay back the loan by a specific date, it is important for you to have a source of repayment. If you are unable to repay the loan, you may have to sell your home and move.

          Government and Non-Profit Agencies

          • To obtain a current list of lenders participating in the FHA-insured program, sponsored by the Department of Housing and Urban Development (HUD), or additional information on reverse mortgages and other home equity conversion plans, write to:

          AARP Home Equity Information Center
          American Association of Retired Persons
          601 E St., NW
          Washington, DC 20049

          • A free information kit, including an extensive state-by-state Reverse Mortgage Lenders List, is available from the American Association of Retired Persons (AARP). Address a postcard to:

          D15601
          AARP Home Equity Information Center EE0756
          601 E St. NW
          Washington, DC 20049

          • For additional information, you also may contact the:

          National Center for Home Equity Conversion
          7373 147 St. West Suite 115
          Apple Valley, MN 55124

          • If you have a question or complaint concerning reverse mortgages, you may write:

          Correspondence Branch
          Federal Trade Commission
          Washington, DC 20580

          (Although the FTC generally does not intervene in individual disputes, the information you provide may indicate a pattern or practice that requires action by the Commission.)

          Source: CPA Site Solutions

          Roth IRAs differ from other tax-favored retirement plans, including other IRAs (called "traditional IRAs"), in that they promise complete tax exemption on distribution. But there are other important differences as well, and many qualifications about their use. This Financial Guide shows how they work, how they compare with other retirement devices--and why YOU might want one, or more.

          With most tax-favored retirement plans, the contribution to (i.e., investment in) the plan is deductible, the investment compounds tax-free until distributed, and distributions are taxable as received. There are variations from this pattern, as with 401(k)s where the exemption for salary diverted to a 401(k) takes the place of a deduction and for after-tax investments where invested capital is tax-free when distributed

          With a Roth IRA, there’s never an up-front deduction for contributions. Funds contributed compound tax-free until distributed (standard for all tax-favored plans). And distributions are completely exempt from income tax.

          How Contributions Are Treated

          Except for conversion of traditional IRAs to Roth IRAs—and that’s a huge exception, as we’ll see—no more than $4,000 can go into a Roth IRA. To put in even that much, you must earn $4,000 from personal services and have income (technically, modified adjusted gross income or MAGI) below $95,000 if single or $150,000 on a joint return. The $4,000 limit phases out on incomes between $95,000--$110,000 (single) and $150,000--$160,000 (joint). Also, the $4,000 limit is reduced for contributions to traditional IRAs though not SEP or SIMPLE IRAs.

          You can contribute to a Roth IRA for your spouse, subject to the income limits above. So assuming earnings (your own or combined with your spouse) of at least $8,000, up to $8,000 ($4,000 each) can go into the couple’s Roth IRAs. As with traditional IRAs, there’s a 6% penalty on excess contributions. Contribution dollar limits for your own Roth IRA rise to $5,000 for 2008, and after (double these amounts for Roth IRAs of a couple). Additional "catch-up" contributions are allowed persons age 50 or over, of $1,000 (2006 and after). The rule continues that the dollar limits are reduced by contributions to traditional IRAs.

          Credit for low-income Roth IRA investors. "Lower-bracket" taxpayers age 18 and over are allowed a tax credit for their contributions to a plan or traditional or Roth IRA. Credit is allowed on joint returns of couples with modified adjusted gross income (MAGI) below $50,000, heads-of-household below $37,500 and others (single, married filing separately) below $25,000. These amounts are indexed for inflation starting in 2007. Credit is a percentage (10%, 20%, 50%) of the contribution, up to a contribution total (considering all contributions to all plans and IRAs) of $2,000. The lower the MAGI, the higher the credit percentage: the maximum credit is $1,000 (50% of $2,000).

          How Withdrawals Are Treated

          Since all your investments in a Roth IRA are after-tax, your withdrawals, whenever you make them, are often tax-free. But the best kind of withdrawal, which allows earnings as well as contributions and conversion amounts to come out completely tax-free, are qualified distributions. These are withdrawals meeting these conditions:

          1. At least 5 years have elapsed since the first year a Roth IRA contribution was made or, in the case of a conversion, since the conversion occurred and
          2. At least one of these additional conditions is met:
          • The owner is age 59 ½ .
          • The owner is disabled.
          • The owner has died (distribution is to estate or heir).
          • Withdrawal is for a first-time home purchase (tax-free limit of $10,000).

          A qualified distribution isn’t subject to the 10% early withdrawal penalty.

          Where a withdrawal isn’t a qualified distribution, it’s still generally treated as tax-free until after all after-tax contributions and conversion amounts have been recovered. However, nonqualified distributions can be hit by the early withdrawal penalty even if not subject to income tax.

          Qualified distributions after the owner’s death are tax-free to heirs. Nonqualified distributions after death—which are distributions where the 5-year holding period wasn’t met—are taxable income to heirs as they would be to the owner (the earnings are taxed), except there’s no penalty tax on early withdrawal. However, an owner’s surviving spouse can convert an inherited Roth IRA into his or her own Roth IRA. This way, distribution can be postponed, so that nonqualified amounts can become qualified, and the tax shelter prolonged.

          Roth IRA assets left at death are subject to federal estate tax, just as traditional IRA assets are.

          Converting From a Traditional IRA

          Opportunity. Cost. Risk. These features of your option to convert your traditional IRA to a Roth IRA are what’s caused most of the excitement about Roth IRAs. Conversion means that what would be taxable traditional IRA distributions can be made tax-exempt Roth IRA distributions. That’s the Opportunity. The Cost—tax cost—is that the amount converted this year or after is fully taxable in the year converted, except for the portion of after-tax investment in the traditional IRA.

          So you must pay tax now (though there’s no early withdrawal penalty) for the opportunity to withdraw tax-free later, an opportunity that can extend to your heirs.

          Conversion is allowed only to taxpayers with income (again, MAGI) of $100,000 or less in the conversion year. That’s $100,000 for a single person and $100,000 for a couple filing jointly; a married person filing separately can’t convert. (The taxable amount converted isn’t counted in figuring whether income exceeded $100,000.) The risk is that if income exceeds $100,000, the conversion is taxable—as you expected—but the IRA your funds went to doesn’t qualify as a Roth IRA. And you will owe a 6% excess contribution penalty and maybe a 10% early withdrawal penalty (on the traditional IRA withdrawal).

          The rule barring conversion to Roth IRA for taxpayers with MAGI above $100,000 is scheduled to end in 2010.

          Note: Congress passed the removal of the $100,000 MAGI ceiling under unusual circumstances.  Some tax professionals question whether the rule will actually go into effect.

          Tip: Such a removal would benefit higher-income taxpayers by effectively eliminating the rule barring ROTH IRA contributions for taxpayers with incomes above $110,000 (single) or $160,000 (married filing jointly).  That is, such taxpayers could contribute to traditional IRAs (where there is no such barrier) and then convert them to Roth IRAs in 2010.  If this technique interest you, check for your professional adviser's view.

          The IRS has done what it can to make conversion easy. You can have a fund transfer of your traditional IRA assets to a Roth IRA, which is done between the trustees of the two IRAs, whether they are in the same or different financial institutions. Or you can do it yourself, moving the assets from the traditional to the new Roth IRA, which is subject to tax withholding and which must be completed within 60 days of withdrawal (the 60-day deadline can be extended in hardship cases).

          Conversions from traditional to Roth IRAs are sometimes called rollovers. But you may rollover—tax-free—from one Roth IRA to another Roth IRA. This might be done to set up separate Roth IRAs for different beneficiaries.

          Directly converting retirement assets from a company or Keogh plan to a Roth IRA won't be allowed until 2008. But it’s legal to rollover from such plans to a traditional IRA, and then convert. And you can convert SEP and SIMPLE IRAs to Roth IRAs.

          Undoing a Conversion to a Roth IRA

          Since everyone recognizes that conversion is a high-risk exercise, the law and liberal IRS rules provide an escape hatch: You can undo a Roth IRA conversion by what IRS calls a "re-characterization". This move, by which you move your conversion assets from a Roth IRA back to a traditional IRA, makes what would have been a taxable conversion into a tax-free rollover between traditional IRAs.

          Tip: One reason to do this would be where you find you’ve exceeded the $100,000 income ceiling for Roth IRA conversions.

          Tip: Another reason to do this, dramatized by a volatile stock market, is where the value of your portfolio drops sharply after the conversion.

          Example: If your assets are worth $180,000 at conversion and fall to $140,000 later, you’re taxed on up to $180,000, which is $40,000 more than you now have. Undoing—re-characterization—avoids the tax, and gets you out of the Roth IRA.

          Re-characterization can be done any time until the due date for the return for the year of conversion. Unfortunately, there’s no current protection against the case where a taxpayer is later—say, on audit—found to exceed the $100,000 income ceiling because of overlooked income or mistaken deductions—one more example of conversion’s high risk. (IRS can grant special relief, on request, for good faith errors.)

          Can you undo one Roth IRA conversion and then make another one—a reconversion? Yes—once, subject to these requirements: Reconversion must take place in the tax year following the original conversion to Roth IRA, and the reconversion date must also be more than 30 days after the previous recharacterization transfer from the Roth IRA back to the traditional IRA.

          Withdrawal Requirements

          Since tax-favored retirement plans are for retirement, there’s a general requirement that plan withdrawals must begin when the owner reaches age 70 ½, and continue at a rate calculated to pay out completely at the end of the owner’s life expectancy (or a joint and survivor life expectancy with a beneficiary). The beginning date can generally be postponed for employees who continue working, but the rule is absolute for business owners and for IRAs.

          But not for Roth IRAs. Roth IRA owners need not withdraw at any age, and an IRA beneficiary can spread withdrawal over his or her life expectancy.

          Also, unlike traditional IRAs (but like other tax-favored retirement plans), a Roth IRA owner who continues working may continue to contribute to the Roth IRA.

          Use In Estate Planning

          Though Roth IRAs enjoy no estate tax relief, they are already figuring in estate plans. The aim is to build a large Roth IRA fund—largely through conversion of traditional IRAs—to pass to beneficiaries in later generations. The beneficiaries will be tax exempt on withdrawals (of qualified distributions) and the Roth IRA tax shelter continues by spreading withdrawal over their lifetimes.

          *   *   *   *

          Long-term planning with Roth IRAs. If you would be allowed a deduction for a contribution to a traditional IRA, contributing to a Roth IRA means surrendering current tax reduction for future tax reduction (to zero) for qualified distributions. This can be presented as an after-tax return-on-investment calculation involving assumed future tax rates. The higher the projected tax rate at withdrawal, the more tax Roth IRA saves.

          Comparable considerations apply to conversions to Roth IRAs. Here the taxpayer incurs substantial current tax cost (directly or indirectly reducing the amount invested) for future tax relief to the taxpayer or an heir. So the return on investment resulting from conversion increases as projected future rates rise.

          A key element in making such projections is the possibility that current and future federal deficits will lead to future tax rate increases—a factor which would tend to encourage current Roth IRA investment and conversion. On the other hand, there’s the question whether Roth IRA benefits currently promised will survive into future decades.

          Highly sophisticated planning is required for Roth IRA conversions. Consultation with a qualified advisor is a must.

          © CPA Site Solutions

          The value of your savings can be affected by both taxes and inflation. Use this calculator to determine how much your savings will be worth with this in mind.

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          There are ways to withdraw funds early from retirement plans like your 401(k) without getting hit with a tax penalty.

          The rules are a bit rigid and, from a long-term perspective, you should think carefully before taking money out of your retirement plan until you're retired. In most cases, it's not the best strategy. Nonetheless, it can be done.

          First, you need to know the rules. Distributions from employer-sponsored retirement plans and individual retirement accounts (IRAs) are subject to a 10% penalty if you start withdrawing the funds before you reach age 59 1/2.

          Getting At The Cash, Avoiding The Pain
          There are other options to get at your cash without getting penalized in the process:

          1. Take the money as part of a series of substantially equal periodic payments over your estimated lifespan or the joint lives of you and your designated beneficiary. These payments must be made at least annually, and you base the payments on life expectancies from IRS tables. (See IRS Publication 939: General Rules for Pensions and Annuities.) If payments are from a qualified employee plan, they must begin after you have left the job.

            The payments must be made at least once each year until age 59 1/2, or for five years, whichever period is longer.

          2. If you have extraordinary out-of-pocket medical expenses one year and your medical expenses exceed 7.5% of your adjusted gross income, you can withdraw funds to pay those expenses without paying a penalty. For example, if you had an adjusted gross income of $100,000 and medical expenses of $10,000, you could withdraw as much as $2,500 from your pension or IRA without incurring the 10% penalty tax.
          3. An IRA distribution for first-time home purchases also escapes the penalty. You need to understand the government's definition of a "first time" home buyer. In this case, it's defined as someone who hasn't owned a home for the last two years prior to the date of the new acquisition. You could have owned five prior houses, but if you haven't owned one in at least two years, you qualify.

          The "date of acquisition" is the day you sign the contract for purchase of an existing house or the day construction of your new principal residence begins. The amount withdrawn for the purchase of a home must be used within 120 days of withdrawal and the maximum lifetime withdrawal exemption is $10,000.

          1. Distributions for qualified higher educational expenses also are exempt. Such expenses as tuition, room and board, fees, books, supplies and equipment required for enrollment are all covered. So, too, are expenses for graduate courses. This exception applies to expenses incurred by you, your spouse, children and grandchildren.
          2. IRA distributions made to unemployed individuals (unemployed for more than 12 weeks) for health insurance premiums aren't subject to the 10% penalty tax.
          3. If you receive a distribution due to "separation from service" (you're no longer at the job) in or after the year you reach age 55, you escape the penalty. This exception doesn't apply to distributions from IRAs or annuity or modified endowment contracts.
          4. Distributions due to your death or due to total and permanent disability also avoid the 10% penalty tax. This is not a tax-planning strategy I personally advocate.

          Remember that the above techniques avoid the 10% penalty tax, but they don't avoid the regular income tax that's owed when you start withdrawing funds from your retirement plans. Unless your money is parked in a Roth IRA -- which is after-tax contributions -- you're going to pay a tax.

          Distributions rolled over into another retirement plan or arrangement however, escape both the regular income tax and the 10% penalty tax. Such rollovers should be made directly between your brokers. That way, you even escape the 20% withholding required on distributions that you touch.

          Source: CPA Site Solutions


            Preliminary Note: Nondeductible Items

            If you took out a mortgage to finance the purchase of your home, you are probably making monthly house payments. This house payment may include various costs of owning a home. The only costs you can deduct are real estate taxes actually paid to the taxing authority and interest that qualifies as home mortgage interest.

            Here are some nondeductible items that may be included in your house payment.

            • Fire or homeowner's insurance premiums.
            • FHA mortgage insurance premiums.
            • Any amount applied to reduce the principal of the mortgage.
            >

            Note: Members of the clergy or of the uniformed services who receive a nontaxable housing allowance can still deduct real estate taxes and home mortgage interest. They need not reduce their deductions by the nontaxable allowance.

            What Is Meant by “Real Estate Taxes”?

            Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the tax if it is based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction. The tax must be for the welfare of the general public and not be a payment for a special privilege or service you receive.

            Deductible Taxes

            You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. If you own a cooperative apartment, special rules apply to the deduction, which is generally available to you.

            Purchase of Sale of Realty: How the Deduction Is Divided Up

            Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible, as long as you itemize your deductions.

            For tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.

            Tip: You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You can each deduct your own share, if you itemize deductions, for the year the property is sold.

            Delinquent taxes. Delinquent taxes are unpaid taxes imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. You treat them as part of the cost of your home.

            Caution: Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.

            Refund or rebate of real estate taxes. If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income.

            Items Not Considered Real Estate Taxes

            The following items are not deductible as real estate taxes.

            Charges for services. An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. You cannot deduct the charge as a real estate tax if it is:

            1. A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use),
            2. A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or
            3. A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).

            You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those just listed, are included in the bill. If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it.

            Assessments for local benefits. You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Local benefits include the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property.

            You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. An example is a charge to repair an existing sidewalk and any interest included in that charge.

            If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it.

            An assessment for a local benefit may be listed as an item in your real estate tax bill. If so, use the rules in this section to find how much of it, if any, you can deduct.

            Transfer taxes (or stamp taxes). You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.

            Homeowners association assessments. You cannot deduct these assessments because the homeowners association imposes them rather than a state or local government.

            Special Rules for Cooperatives

            If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets certain conditions.

            Source: CPA Site Solutions

            Contributing to a Variable Annuity creates long term tax deferred growth. Use this calculator to see how a Variable Annuity might fit into your retirement plan.

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            What might it take to save one million dollars? This financial calculator helps you find out.

            Enter in your current savings plan and graphically view your financial results for each year until you retire. Press the "View Report" button for a report that helps you see when you might hit your cool million - and what you might be able to do to possibly achieve this goal.

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              Financial security derives not only from acquiring more money, but from planning. A solid financial plan can alleviate financial worries about the future and ensure that you will meet your financial goals—whether they relate to retirement, asset acquisition, education, or just vacations.

              Tip: Review your financial plan every year to keep it up to date. If you set it up properly initially, it is relatively easy to review and keep current.

              This Financial Guide allows you to take the first step towards a solid plan. By following the instructions and guidelines contained in it, you can find out where you are now and how you can put your plan into action.

              There are many ways to approach setting up a financial plan. The one outlined in this guide is just one of a number of approaches. Your financial advisor can assist you in setting up the financial plan that best meets your particular situation and needs.

              Identify Your Goals

              Spend some time thinking and talking with family members about what you would like to achieve financially. What would make you and them happy? What would be fulfilling? Would you like to start your own business? Retire early? Acquire a vacation home? Pursue a hobby? Travel?

              Perhaps you’d like to change careers, and you’ll need money to finance an education in a different field. Or perhaps you’d like to have a large amount of money to give to your favorite charity. Once you’ve got some idea of what you’d like to accomplish, fill out the Goals Worksheet below...

              • The "Goals" section should state what you’d like to accomplish. Be as specific as possible, e.g., instead of writing "Acquire a bigger home," write "Acquire a home with at least 12 rooms in Anytown."
              • The "Amount" needed should be an estimate of the amount of money you’ll need. For instance, to retire early, you might estimate that you’ll need a $400,000 nest egg by the time you reach age 50, or to buy a vacation home, you might estimate that you’ll need a $50,000 down payment.
              • The "Target Date" section should include the approximate year—or, in the case of short-term goals such as a vacation in the current year, the month—in which you would like to achieve your goal.
              Goals Amount Needed Target Date
                $  
                $  
                $  
                $  
                $  
                $  
                $  
                $  
                $  
                $  

              Determine Your Net Worth

              Your financial plan should include an inventory of the existing financial resources you’ll be using to achieve the goals you decided on above.

              Fill out the personal statement of net worth below. This will enable you to estimate the value of everything you own, minus the value of your debts. When asked for a value, use what the property would fetch if you sold it today—its market value.

              It may take some time to do this, but the effort will be worth it. This is the foundation for your financial plan.

              FINANCIAL STATEMENT

              Date:

              ASSETS (Current Value) TOTAL SELF SPOUSE
              Checking accounts $ $ $
              Savings accounts $ $ $
              Brokerage accounts $ $ $
              Money market accounts $ $ $
              Certificates of deposit $ $ $
              IRA accounts $ $ $
              Keogh accounts $ $ $
              401(k) plans $ $ $
              Pension plans $ $ $
              Other retirement accounts $ $ $
              Life insurance (cash values) $ $ $
              Annuities $ $ $
              Bonds (government) $ $ $
              Bonds (corporate) $ $ $
              Mutual funds $ $ $
              Stocks $ $ $
              Other securities $ $ $
              Money owed to you $ $ $
              Home $ $ $
              Other real estate $ $ $
              Automobiles $ $ $
              Household furnishings $ $ $
              Jewelry $ $ $
              Other assets $ $ $

              Total Assets
              $ $ $
              LIABILITIES (Current Value) TOTAL SELF SPOUSE
              Home mortgage      
              Other mortgages      
              Automobile loans      
              Credit card balances      
              Installment accounts      
              Contractual obligations      
              Money owed to others      
              Income taxes      
              Pledges      
              Other debts      

              Total Liabilities
                   
                     
              Total Assets (from above) $ $ $
              Less Liabilities (from above) $ $ $
              Net Worth (Assets less Liabilities) $ $ $

              This statement should be reviewed to determine which assets are available to achieve the goals you listed above. If most of your net worth is tied up in your home and personal use assets (such as furniture and cars), you may not be able to achieve your goals. Which assets are available to invest towards your goals? Are they sufficient? If not, you may need to liquidate other assets or start a savings plan out of your cash flow to come up with the necessary funds.

              Determine Your Cash Flow

              Once you’ve completed the net worth statement, fill in the cash flow statement below. This will give you an estimate of what you earn per year—your salary, investment income, and retirement income—and what your current expenses are. To fill out this form, it will help to have on hand your check register and one year’s worth of credit card receipts.

              Here’s why the cash flow statement is so important: Once you know how much is coming in and how much of it is going out in the form of expenses, you can start to make adjustments in your discretionary expenses in order to meet your saving and investment goals.

              CASH FLOW STATEMENT

              Period: to

              Income Total Self Spouse
              Salary/Wages $ $ $
              Interest/Dividends      
              Social Security      
              Retirement Plans      
              Reimbursements (only if included as an expense)      
              Sale of investments      
              Other income      

              Total Income
              $ $ $
              Expenses Total Self Spouse
              Savings (including pension plan contributions)      
              Income taxes      
              Property taxes      
              Insurance (health, disability, life, car, home)      
              Mortgage/rent      
              Other debt payments      
              Utilities (heat, electric, water, garbage, phone)      
              Transportation      
              Vacation      
              Medical (other than insurance)      
              Personal (small cash expenditures, such as haircuts)      
              Charitable contributions      
              Food      
              Restaurants      
              Recreation      
              Holiday expenses      
              Gifts      
              Education      
              Clothing      
              Other (children, professional fees, hobbies, etc. -- if large expenditures, create a line item for each)      
              Miscellaneous      

              Total Expenses
                   

              Note: Omit one-time, non-recurring items as they should not be used for budgeting or future planning.

              How much cash flow is available to accumulate assets for the goals identified above? Is it sufficient in combination with your available assets from your net worth statement? If not, you need to examine the above expenses in detail and cut back on those which are discretionary until sufficient cash flow is identified.

              Plan To Achieve Your Goals

              Now that you know what your goals are and have an idea of your financial resources, it’s time to begin making a plan.

              Financial Safety Net

              Determine the funds you’ll need in case of a disaster or emergency. Coverage of such contingencies comes from insurance and from an emergency fund.

              Emergency Fund

              You should have a fund of three to six months—we’ll leave the number of months to your judgment--worth of living expenses to tide you over in case you lose your job or have unexpected bills. The emergency fund should be kept in an accessible account: a money market account is good for this purpose.

              Life Insurance

              Make sure your coverage is adequate. You should have enough coverage, should a catastrophe occur, to ensure your family would continue to enjoy the same level of income it does currently.

              Disability Insurance

              Disability insurance is intended to replace lost income due to the occurrence of illness or accident. Consider whether you need to provide coverage for your family.

              Auto, Home, and Health Insurance

              It’s important to make sure these types of policies provide adequate coverage. If not, an accident or other catastrophe could wipe out a large portion of your assets or cash flow and you may be unable to achieve your goals.

              Establish How Much You'll Need

              Once you have covered your insurance and emergency-fund needs, you can start working towards your financial goals.

              Go back to your Goals Worksheet (above) and enter the goal in the Worksheet below. For each goal, estimate the "Cost Of The Goal," i.e., the cost of achieving that goal. For instance, if you want to retire at age 55, estimate the nest egg you’ll need to accumulate by then. (Don’t bother accounting for inflation right now; this is just an estimate.)

              Then fill in the "Amount On Hand," i.e., the amount you have already saved for that purpose. For instance, if you have $10,000 in a mutual fund IRA, you might wish to allocate that amount to your retirement nest egg.

              Next, write in the the "Amount Still Needed." Then, fill in the "Years To Target Date", i.e., the year you want to achieve your goal. Finally, enter the "Intended Yearly Savings," the amount you need to save each year (the "Amount Still Needed" divided by the "Years To Target Date").

              Goal Cost of the goal Amount on hand Amount still needed Years to target date Intended yearly savings
              $ $ $ $ $ $

              Add up the "Intended Yearly Savings," i.e., the yearly amounts you need to save, in the extreme right-hand column. Look back at the "Savings" amount in the expense portion of your cash flow statement (above). How much are you currently saving? How does this compare with how much you need to save to meet your goals?

              Most people find that the amount they are saving is inadequate.

              Tip: Here are some ways that you might increase the amount you are saving each year:

              • Pay yourself first. Save and invest at least 10% of your after tax income.
              • If possible, earn more or spend less. Put a stop to discretionary spending.

              You might also want to take another look at your goals. Perhaps they need to be modified or the target dates need to be deferred.

              Put The Plan Into Action

              Make a savings plan. How will you save the amounts you have targeted? Will you have them deducted from your paycheck? Will you deposit them into a savings account each month?

              Once you’ve accumulated a chunk of savings for each goal, you’ll need an investment strategy. For each goal, determine how much risk you are willing to take with your savings. This will depend on how much of the money you can afford to lose, how essential the goal is, and your own risk preferences.

              You may have read recently about asset allocation, and wondered whether an investor such as yourself needed to worry about this concept. The answer is a resounding yes. Asset allocation—not fund or security selection, not market timing—is the most important factor in determining how much money you make on your investments. In fact, according to Nobel-Prize-winning research, asset allocation—the type or class of security owned--determines 90% of the return. The remaining 10% of the return is determined by which particular stock, bond, or mutual fund you select, and when you decide to buy it. In short, asset allocation and diversification are the cornerstones of good investing.

              Here, in a nutshell, are important investors:

              1. Come up with your financial profile. Your financial profile is the translation of your goals, risk threshold, and time horizon into a graph or curve, using a computer program. The three factors we just mentioned are plotted on a graph according to the program’s formulas. It’s important to use a good computer program because of the complexity of the task.
              2. Find the right mix of "asset classes" for your portfolio. The right mix of asset classes will balance each other in a way that will give the most possible return for the amount of risk you are willing to take. Using computer programs, asset allocation professionals will determine the proper mix of assets for your financial profile. Over time, the ideal allocation for you will not remain the same; it will change as your situation changes, or in response to changes in market conditions.
              3. Choose investments from each class, based on performance and costs.

              How Does Asset Allocation Work?

              Using computerized formulas, asset allocator's take down information they glean from a questionnaire you have filled out. This information gives them what they need to become familiar with your needs, constraints, and unique circumstances. The following factors should become apparent from the questionnaire.

              • Your risk threshold (how much of your capital you are willing to lose during a given time frame),
              • Your goals (whatever financial planning goals you and your family want to achieve), and
              • Your investing time horizon (mainly, your age and retirement objectives).

              In addition, the professional needs to consider how wealthy you are, what your income tax bracket is, how much of your portfolio needs to be kept liquid, and how often withdrawals will be made from the portfolio.

              The allocator’s goal now is to come up with the right blend of six or seven asset classes, in the right percentages, that will match your financial profile--your risk profile and time horizon.

              Source: CPA Site Solutions